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Maximizing DOD's Untapped Potential to Improve Business Performance: 

DOD Performance Breakthrough Convention: 

Lansdowne, VA: 

October 14, 2009: 

Gene L. Dodaro, 

Acting Comptroller General of the United States: 

It is a pleasure to be here today to discuss business operations at the 
Department of Defense (DOD). The Deputy Secretary and other conference 
organizers are to be commended for bringing together senior leaders 
from inside and outside DOD. Collaboration and partnering are central 
enablers. We have worked hard to incorporate these principles into 
daily practice at GAO. 

I recognize that business practices at DOD are not going to change 
overnight. But this conference can help this process by encouraging an 
exchange of ideas. By sharing professional experiences and expertise, 
everyone here has an opportunity to enrich DOD's knowledge base and 
help build the Department's capacity to develop new solutions to old 
problems. Your presence here today is evidence of the defense 
workforce's strong work ethic and commitment to its mission. These 
basic DOD values, combined with strong leadership and follow-through, 
can achieve huge improvement in business practices because there is a 
lot of untapped potential at DOD to get better results and the best 
support to the warfighter. 

As I looked over the conference materials, the goals set forth for DOD 
are laudable. Those goals are to: 

--demonstrate support for the President's directive to improve business 

--showcase success stories about enterprise-wide performance 
improvement; and: 

--establish an ongoing review process to solve enterprise-wide 

These goals recognize the shared opportunities and responsibilities to 
address longstanding weaknesses in DOD business operations and achieve 
measurable and sustainable results. Identifying the challenges is the 
easy part, as those of you who navigate DOD's business processes on a 
daily basis know all too well. The hard part is identifying solutions, 
taking action, sustaining progress, and maintaining momentum. 

As is the case for other federal agencies, the Nation's fiscal 
situation has significant implications for DOD. Specifically, the 
Department faces competing demands for resources and a number of 
internal fiscal pressures as it tries to support ongoing operations, 
rebuild readiness, and prepare for the future. While these 
circumstances are challenging, they also underscore the need for 
constructive change. 

This afternoon, I will discuss how DOD can leverage this opportunity to 
encourage business transformation. My intent is to stimulate your 
thinking and encourage decisive actions to help DOD operate more 
efficiently and effectively. I expect that the presentations you will 
hear over the next few days will describe projects that have already 
improved business performance. My hope is that those presentations may 
also be an impetus for future change. 

Fiscal Challenges Facing the Nation and DOD: 

No one and no organization is immune from America's fiscal challenges. 
That includes DOD. Given the reality of growing federal budgetary 
constraints, it is essential that DOD become more efficient and put its 
resources to better use. 

It is important to have a perspective about our government's fiscal 
challenges before talking about the fiscal pressures facing DOD. 
Weaknesses in the economy and financial markets--and the government's 
response to them--have contributed to an increase in the federal 
deficit and debt. As shown in the table below, the fiscal year 2009 
deficit reached a record $1.4 trillion and the debt held by the public 
exceeded 50 percent of GDP. 

Figure 1: Deficits, Debt Held by the Public and Debt Subject to Limit: 

[Refer to PDF for image: table] 

Source: GAO. 

[End of figure]  

While a lot of attention has been given to the government's current 
fiscal situation, the government faces even larger financing challenges 
that will persist long after the economy recovers and the financial 
markets stabilize. As this graph shows, recent GAO simulations indicate 
that federal debt held by the public will increase dramatically over 
the next several decades and could trend towards 200 percent of GDP. In 
the Baseline Extended simulation, which reflects current law through 
2019 and then holds revenue and spending other than major entitlement 
programs constant as a share of GDP, discretionary spending is lower as 
a share of the economy, and revenues are higher than the 20-year 
historical average. In the Alternative simulation, which reflects 
historical trends and policy preferences, both discretionary spending 
and revenue as a share of the economy are nearly at the historical 
averages. Let me put this into perspective. Under one scenario, in a 
little over 10 years, debt held by the public as a share of GDP could 
exceed the historical high reached in the aftermath of World War II. 

Figure 2: Debt Held by the Public As a Share of GDP Under Two Different 
Fiscal Policy Simulations: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

These debt levels reflect the cumulative effect of growing deficits. 
While the timing of deficits and the resulting debt buildup varies 
depending on the assumptions used, both simulations show that the 
federal government is on an unsustainable path. 

Figure 3: Federal Budget Surpluses and Deficits Under Different Fiscal 
Policy Situations: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

What drives this outlook? Primarily rising health care costs and an 
aging population. Assuming no changes in Medicare, Medicaid or Social 
Security, spending on those programs and interest on the federal debt 
will account for an ever-growing share of the economy, which will in 
turn affect the availability of resources for discretionary spending. 
If revenue remains near the historical average of about 18 percent for 
the next few decades, which is depicted by the line in the graph below, 
every federal agency, including DOD, will be subject to tighter budgets 
as discretionary spending is squeezed. 

Figure 4: Potential Fiscal Outcomes Under GAO's Alternative Simulation: 
Revenues and Composition of Spending: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

Clearly, DOD is unique among federal agencies due to its size and 
budget as well as the complexity of its organizational structure and 
mission. Not only does its budget represent a little over half of the 
entire federal government's discretionary spending, the level of 
resources provided to the Department has increased significantly over 
time, as the following graph shows. For fiscal year 2009, Congress 
provided about $664 billion for DOD, including about $513 billion for 
base needs and about $151 billion for contingency operations. And, 
since 2001, DOD has received a total of about $893 billion to support 
contingency operations, including military operations in Iraq, 
Afghanistan, and elsewhere around the world. 

Figure 5: DOD Budget Authority FY 2001-2009 (Excluding Contingency 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

Notwithstanding the external pressures, DOD faces its own near-term and 
long-term internal fiscal pressures as it attempts to balance competing 
demands from within. Let me touch on a few areas we have highlighted 
for the Congress and the new administration. 

--First, ongoing operations will continue to require substantial 
amounts of resources. The magnitude of costs for operations in both 
Iraq and Afghanistan will depend on several factors and, in some cases, 
assumptions and decisions that have not yet been made. For example, 
costs will be influenced by how the U.S.-Iraq security agreement and 
associated troop redeployment plans are implemented, the nature and 
extent of continued U.S. military and civilian presence in Iraq as well 
as decisions on the size of the force to be deployed to Afghanistan, 
the types of facilities needed to support troops remaining in and 
around Iraq, the amount of equipment to be repaired or replaced, as 
well as health care needs of returning service members. Although 
drawing down troop levels may on its surface appear to lower costs, GAO 
has seen from previous operations in the Balkans and Kosovo that costs 
could rise in the near term because of the cost variables I just 

--Extended military operations have taken a toll on readiness and 
rebuilding the force will undoubtedly have a big price tag. Since 9/11, 
U.S. forces have operated at a high pace and gained considerable combat 
experience. But this high operational tempo has significantly affected 
the readiness of the force, especially in the Army and Marine Corps. 
Personnel are deploying frequently and have little time to train for 
anything other than counterinsurgency missions. Equipment is used 
repeatedly, causing wear and tear. Units that are not deployed are 
transferring equipment and personnel to deploying units, causing some 
shortfalls. Also, the Air Force and the Navy are facing challenges in 
maintaining aging aircraft and ships. Rebuilding readiness is a complex 
and costly effort, but it will be even more challenging because, at the 
same time, DOD is pursuing broad-based initiatives to grow, modernize, 
and transform its forces and capabilities. 

--Personnel and health care costs are increasing. DOD's military 
personnel outlays have risen significantly since fiscal year 2000, 
fueled in part by increases in basic pay, housing allowances, 
recruitment and retention bonuses, incentive pays and allowances, and 
other special pays. In addition, a large portion of DOD's compensation- 
related costs is in the form of benefits and deferred compensation, and 
DOD's costs to provide benefits such as health care have continued to 
spiral upward. Expanded health care to reservists, their families, and 
retirees has been the primary cost driver in growing benefits costs. 

--Cost growth in weapon systems programs remains a significant problem. 
In fact, total acquisition cost growth on DOD's fiscal year 2008 
portfolio of major programs has reached nearly $300 billion over 
initial estimates. DOD's ability to successfully adapt to budgetary 
constraints will depend in great measure on its ability to better 
manage weapon systems acquisition. This is a long-standing challenge at 
DOD. Back in 1990, GAO first designated DOD's management of major 
weapon systems acquisitions as a high-risk area. The bottom line is 
that programs continue to take longer, cost more, and deliver fewer 
quantities and capabilities than originally planned. Why does this 
occur? It's because at the program level, programs are initiated 
without enough knowledge about system requirements, technology and 
design maturity. Lacking such knowledge, managers rely on assumptions 
that are consistently too optimistic, exposing programs to significant 
and unnecessary risk, and ultimately cost growth and delays. Cost 
overruns lead to fewer resources for other priorities and reduced 
buying power for DOD, and schedule delays mean that the warfighter does 
not get critical capabilities when needed and therefore relies on 
legacy systems or goes without. While I will touch on this later, I do 
want to say that recent statements and actions of the President, 
Congress, and the Secretary of Defense to bring greater attention to 
acquisition reform are encouraging. 

Targets of Opportunities for Reform: 

Given the rising pressures on the federal budget in both the short and 
long term as well as the internal fiscal pressures DOD faces, it can no 
longer afford to conduct business as usual. DOD has a proven track 
record in maintaining a highly capable warfighting force, but has not 
achieved the same level of effectiveness on its business side. For more 
than a decade, DOD has dominated GAO's list of federal programs and 
operations that we consider to be high-risk and vulnerable to fraud, 
waste, abuse, and mismanagement. In fact, all the DOD programs on the 
high-risk list relate to business operations that support the 
warfighter, including systems and processes related to management of 
contracts, finances, the supply chain, and support infrastructure, in 
addition to weapon systems acquisition. Inefficiencies and other 
longstanding weaknesses in these areas lead to challenges in supporting 
the warfighter, billions of dollars being wasted annually, and missed 
opportunities to free up resources for higher priority needs. 

Clearly, DOD's size and complexity contribute to the challenges it 
faces in improving business performance. To the Department's credit, we 
have seen greater top management emphasis on reform in the past several 
years as well as measurable progress in some areas. It is obvious that 
this progress would not have been possible without the significant time 
and efforts of a highly competent, hardworking and dedicated defense 
workforce, including those of you who are here today. 

While a change in administration requires concerted efforts from all 
levels to sustain momentum from the past, it also offers new 
opportunities for change. In this context, we see positive indicators 
that suggest the environment is conducive for DOD to make great 
strides. For example: 

* President Obama has emphasized, publicly and in directives, that the 
federal government needs to be more transparent and that contracting 
reforms are needed across the federal agencies; 

* Secretary Gates, in developing DOD's fiscal year 2010 budget 
submission, initiated decisions to adjust or terminate programs which 
indicated a willingness to reevaluate programs and make the hard 
decisions to eliminate or take other corrective action on those that 
are not performing well; 

* In December 2008, DOD revised its acquisition policy in ways that 
could, if implemented properly, provide a foundation for developing 
individual acquisition programs with sound, knowledge-based business 
cases. This revision establishes early milestone reviews, requires 
completion of key systems engineering activities and competitive 
prototyping, and emphasizes preliminary design reviews prior to program 
initiation; and: 

* Also, the Congress enacted the Weapon System Acquisition Reform Act 
of 2009 to add further discipline and accountability to the acquisition 
system. This legislation contains several requirements, including that 
DOD develop mechanisms to consider trade-offs among cost, schedule, and 
performance in establishing program requirements and to certify that 
trade-offs have been made. 

DOD can capitalize on this renewed emphasis on achieving greater fiscal 
discipline, accountability and effectiveness, and take decisive action 
to produce results in the near-term. Before discussing specific targets 
of opportunity, let me highlight some key elements that must be present 
to achieve near-term results. 

It will clearly take sustained and focused top-level leadership and 
sound plans to guide transformation efforts. For the first time, DOD 
has a Chief Management Office position, established in law as part of 
the Deputy Secretary of Defense's responsibilities. As the Chief 
Management Officer, the Deputy Secretary is responsible, with 
assistance from the Deputy Chief Management Officer, for developing a 
strategic management plan for business operations, and integrating 
efforts to transform business operations. And the military departments 
are also statutorily required to have chief management officers, 
business transformation offices, and business transformation plans. At 
this point, DOD has taken some positive steps to institutionalize these 
positions and organizations, but in some cases, decision-making 
authority and relationships are not yet well defined. 

But just creating positions and offices is not enough; success will 
depend on how effectively the department and the military departments 
can institutionalize these positions and organizations. This would 
include defining and clarifying the respective authorities, roles, and 
responsibilities. To do so will afford senior leaders, and those 
responsible for implementation such as you, the authority and means to 
become advocates for transformational change. 

Getting leaders and organizations in place and developing sound plans 
is a good start. But to achieve real reform, the Department needs to 
set priorities, strengthen management accountability, execute its 
plans, gauge actual progress against goals, and make adjustments as 
needed. As part of GAO's broad body of defense related work, we have 
routinely seen that there is a lack of focus on developing and using 
interim performance measures to measure progress and the impact of 
actions taken. Everyone here has most likely seen many DOD improvement 
initiatives, often great in concept, fail or fall to the wayside due to 
a lack of sustained focus. Transformation initiatives need to be set 
forth into measurable steps toward a long-term goal, and then interim 
measures used to gauge progress and adjust strategy if needed. This 
approach is key to solving many of these long-standing problems. 

Now let me turn to a few key examples of where DOD can tap its 
potential to improve business operations, save money, and optimize 
support to the warfighter. 

Weapon systems acquisition management: 

Probably one of the best examples of where DOD could make real progress 
in the near-term is in improving its approach to acquiring major weapon 
systems. Since 2003, DOD's portfolio of major defense acquisition 
programs has grown from 77 to 96 programs; and its investment in those 
programs has grown from $1.2 trillion to $1.6 trillion (fiscal year 
2009 dollars).[Footnote 1] The chart below depicts the change in the 
size and performance of DOD's portfolios of major acquisition programs. 

Figure 6: Analysis of DOD Major Defense Acquisition Program Portfolios: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

And, as the graph below shows, over 40 percent of all the major 
programs in DOD's fiscal year 2008 portfolio are about 25 percent over 
budget compared to initial estimates. 

Figure 7: DOD Cost Outcomes: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

To add to the challenges, the average delay in delivering initial 
capabilities in DOD's portfolio of weapon systems programs has 
increased over time to 22 months, as shown in the graph below. DOD's 
performance in some of these areas is driven by older programs, as 
newer programs, on average, have not shown the same degree of cost and 
schedule growth. 

Figure 8: DOD Program Schedule Outcome: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

Over the next 5 years, DOD expects to invest more than $357 billion on 
major defense acquisition programs. To put the size of this figure in 
context, that is close to half of what Congress has provided to support 
overseas contingency operations over the past 8 years. Much of this 
investment will be used to address cost overruns due to shortcomings in 
planning, execution, and oversight. These types of problems have 
plagued DOD's weapon systems portfolio for the past 30 years. We see 
these problems as being at odds with the very capable and dedicated 
people we deal with frequently in the program offices and other key 
organizations. So, why aren't good people getting better outcomes? We 
have come to see recurrent problems as not due primarily to mistakes, 
lack of expertise, or unforeseeable events. Rather we see them as an 
outgrowth of a system in which key processes and incentives are better 
at saying "yes" than "no" to programs that do not measure up. The 
challenge is to change the dynamics of this culture. 

Because of the magnitude of the investment and the current fiscal 
environment, DOD can no longer afford to let cost growth go unchecked 
and programs inch towards completion. On a positive note, Secretary 
Gates has identified the need for weapon systems acquisition reform as 
chief among DOD's institutional challenges. DOD is off to a good start. 
Last December, DOD made major revisions to its acquisition policies, 
which address many of the problems that can be traced back to the 
acquisition system. The revisions, which are in line with our past 
recommendations, aim to provide key department leaders with the 
knowledge needed to make informed decisions before a program starts and 
to maintain discipline once it begins. To improve outcomes on the 
whole, though, DOD must ensure that these policy changes are 
immediately and consistently put into practice and reflected in 
decisions made on individual acquisitions. It must also clearly assign 
accountability to an individual or individuals for its implementation. 

Additionally, Secretary Gates has identified programs that should 
either be adjusted or terminated, based in large part on their 
performance, cost-effectiveness, and ultimate value to the war fighter, 
which is an encouraging sign of change. However, process reforms, 
funding cuts, and cancellations are not enough to change the culture. 
Mission-essential programs with executable strategies, regarding the 
technology, design, test, and overall cost, must win the budget 
battles. Tough choices will need to be made about specific weapon 
systems, and stakeholders--from the military services to industry to 
the Congress--will have to play a constructive role in this process. 

On a positive note, we have seen progress on new programs. For example, 
since 2006, programs entering system development have done so with 
higher levels of technology maturity--a key indicator of program 
success. Additionally, we found in our last comprehensive review of 47 
DOD's major acquisition programs that there were a few modest 
indications of improvement within the portfolio from 2007 to 2008, such 
as the fact that the total percentage of programs with 25 percent or 
more increases in program unit costs decreased by a few percentage 

DOD still has work to do in this area, and there are ample 
opportunities for reform and improvement that can yield tangible 
results in the near-term and free up resources. From that standpoint, 
DOD needs to continue to review existing and planned programs to: 

* determine the right mix of programs to invest in by making better 
decisions as to which programs should be pursued or not pursued given 
evolving mission needs and both existing and expected funding, 

* ensure that programs are executable by matching requirements with 
resources and locking in those requirements, and: 

* make it clear that programs will then be executed based on actual 
knowledge and mature technology, and not assumptions that are often 
overly optimistic, and that program managers and senior leaders will be 
held responsible for that execution. 

Inventory management: 

Improving DOD's approach to inventory management is an opportunity for 
reform that could yield significant savings now and free up resources 
for other priorities. For example, DOD officials have estimated that 
the level of investment in the department's supply chains is more than 
$150 billion a year, and the value of its spare part inventories has 
grown by tens of billions of dollars in recent years. Yet, the 
department continues to have substantial amounts of secondary inventory 
that are in excess to requirements. For example, in our last review of 
the Air Force's inventory, we reported that more than half of its 
secondary inventory, valued at about $31 billion, was not needed to 
support required inventory levels from 2002 through 2005. 

More recently, in our review of the Navy's secondary inventory, we 
found that, on average for fiscal years 2004 through 2007, about $11 
billion, or around 60 percent, of the total annual inventory value of 
$18.7 billion was needed to meet current requirements, but $7.5 
billion, or about 40 percent, exceeded current requirements. The graph 
below shows, by fiscal year, the dollar amount of inventory that met 
and exceeded current requirements. 

Figure 9: Navy Secondary Inventory Meeting and Exceeding Current 
Requirements (Fiscal Years 2004-2007): 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

The Army is also retaining too much inventory that is not needed to 
meet requirements. Our review of the Army's secondary inventory showed 
that, on average, about $12.7 billion, or about 78 percent, of the 
total annual inventory value of $16.3 billion was needed to meet 
current requirements, whereas $3.6 billion, or around 22 percent, 
exceeded current requirements.[Footnote 2] Similar to the Navy, the 
graph below illustrates that the trend of retaining excess inventory 
has remained stable from fiscal years 2004 through 2007. 

Figure 10: Army Secondary Inventory Meeting and Exceeding Current 
Requirements, (Fiscal Years 2004-2007): 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

A major cause for the accumulation in excess inventories is weaknesses 
in the military services' approach to forecasting demand as well as a 
lack of metrics and targets focusing on the cost efficiency of 
inventory management. More effective processes that identify and manage 
acquisition lead times are of critical importance to maintaining cost- 
effective inventories, budgeting, and having materiel available when it 
is needed. Overestimates and underestimates of acquisition lead time 
contribute to inefficient use of funds and potential shortages or 
excesses of spare parts. 

The Department can strengthen the accountability and management of its 
secondary inventory. For example, we have recommended that the services 
evaluate why they experience decreases in demand for supplies, which 
contribute to having excess inventories; determine what actions are 
needed to better forecast demand; and take steps to implement these 
actions. Furthermore, we have made recommendations to develop 
performance goals and metrics to assess and track the cost efficiency 
of the services' inventory management practices and to provide for a 
greater oversight role to the service chief management officers for 
improving inventory management. We have also recommended changes in 
inventory management policies and practices that contribute to excess 
inventories. Lastly, DOD needs to implement effective processes to 
identify/manage acquisition lead times in order to maintain cost- 
effective inventories, budget wisely, and have materiel available when 
needed. Taking steps such as these to transform the way in which DOD 
manages its supply chain and inventory supplies will result in better 
mission-essential support to the warfighter and will free up resources 
wasted or tied up in unneeded spare parts for higher priority needs. 

DOD has generally concurred with our recommended actions and has taken 
some steps to improve inventory management. For example, the Air Force 
has made some needed policy changes, and the Army has directed that 
more up-to-date operational information be provided to inventory 
managers so they can make more informed purchase decisions. 
Furthermore, we understand that the Office of the Secretary of Defense 
has initiated a study to develop options for improving demand 
forecasting of spare parts. 

Recently, the Congress has also shown increased interest in reforming 
DOD's inventory management practices. For example, the House, as part 
of its report accompanying the fiscal year 2010 National Defense 
Authorization Act, suggests actions that DOD can take to improve the 
ways in which it forecasts demands for spare parts. Similarly, the 
conference report accompanying the Act would require DOD to submit a 
comprehensive plan for improving its overall inventory management 
practices, from improving demand forecasting to reducing current excess 
inventory stocks. 

Contract management: 

DOD's management of contracts for goods and services, and the use of 
contractors in general, is another area that needs greater scrutiny and 
offers potential for saving money. Unfortunately, DOD's contracts have 
not always led to the desired outcomes and it is not always clear that 
DOD has been using sound business practices to acquire goods and 
services. On a positive note, the Secretary of Defense and other senior 
leaders have acknowledged these weaknesses and the need for reform, 
which has begun to prompt action within the Department. 

Taking deliberate action now is critical because DOD has become reliant 
on contractors to meet critical missions, including those related to 
ongoing operations, and to support acquisition functions. For example, 
DOD reported that, as of the second quarter of 2009, over 200,000 
contractor personnel were working in Iraq and Afghanistan.[Footnote 3] 
To put the level of contracting activity into perspective, between 
fiscal years 2001 and 2008, DOD obligations on contracts when measured 
in real terms have more than doubled to over $387 billion in total, and 
to more than $200 billion just for services. At the same time, DOD's 
acquisition workforce, responsible for contract management, has not 
similarly grown. In fact, during that same time period, DOD's 
contracting career field grew by only about 1 percent. The graph below 
clearly illustrates the problem--that the size of the contracting 
workforce has not kept pace with level of contracting activity. 

Figure 10: Changes in DOD's Contract Obligations and Contracting 
Workforce, Fiscal Years 2001 through 2008: 

[Refer to PDF for image: chart] 

Source: GAO. 

[End of figure] 

To its credit, DOD has issued guidance to address contracting 
weaknesses and encourage the use of sound business arrangements. For 
example, consistent with congressional direction and GAO's 
recommendations, DOD established a process for reviewing major services 
acquisitions; issued regulations to better manage its use of 
contracting arrangements that can pose additional risks for the 
government, including time-and-materials contracts and undefinitized 
contracting actions; and has efforts under way to identify and improve 
the skills and capabilities of its workforce. For example, in November 
2008 we reported that DOD has been developing, revising, and finalizing 
new joint policies and guidance on the department's use of contractors 
to support deployed forces and has begun developing training programs 
for personnel that do not work in the acquisition field to provide 
information necessary to operate effectively on contingency contracting 
matters and work with contractors on the battlefield.[Footnote 4] 

However, there is still much work to be done. We have recommended that 
DOD needs to (1) assess the risks that its increasing reliance on 
contractors poses, (2) determine the appropriate mix of contractor, 
civilian, and military personnel in shaping its total force for the 
future, including the role and use of contractors to support deployed 
forces, and (3) ensure that it maintains an acquisition workforce that 
is adequately sized, trained, and equipped, so that it can effectively 
plan, negotiate, award, and manage the range of contracts needed to 
meet the department's needs.[Footnote 5] In addition, because DOD has 
paid billions in award and incentive fees to contractors regardless of 
acquisition outcomes, we have also recommended ways that DOD can 
continue to strengthen the link between contractor monetary incentives, 
such as award and incentive fees, and acquisition outcomes, which has 
started to show positive returns. Lastly, DOD should continue to focus 
attention on higher risk contracting strategies, such as the use of 
time-and-materials contracts and undefinitized contract actions, to 
ensure effective management of these approaches. Such efforts would 
also be consistent with recent direction from the Administration to 
reduce the use of high risk contracting strategies. 

These critical contracting reforms, if successfully implemented, will 
improve the credibility of DOD's contracting processes. This will not 
only help ensure that desired outcomes are achieved, but will also 
enhance the return on the significant investments of taxpayer dollars 
for the contracting of goods and services. 

Financial management: 

Last but certainly not least, DOD must have reliable financial 
information. While DOD represents a big share of the federal budget, it 
is one of the few federal entities that cannot accurately account for 
its spending or assets. It is one of only 3 entities in the entire 
government that cannot pass the test of an independent audit. Without 
accurate financial information, DOD is severely hampered in its ability 
to make sound budgetary and programmatic decisions, monitor trends, 
make adjustments to improve performance, or maximize the use of 

Since the first financial statement audit was attempted at DOD nearly 
20 years ago, GAO has consistently called for actions to address 
weaknesses in DOD financial management.[Footnote 6] DOD has launched 
several reform efforts over the years, but these have met with little 
success. Continued financial management and related deficiencies hinder 
DOD's ability to control costs, ensure basic accountability, anticipate 
future costs and claims on the budget, measure performance, and 
maintain control over funds. Problems with asset accountability further 
complicate critical functions, such as supporting the current plans to 
withdraw troops and equipment from Iraq. 

DOD's new comptroller hopes to increase the program's chances for 
success by improving budgetary information and asset accountability. As 
shown below, the emphasis will be on two areas. First, strengthening 
information and processes supporting the Department's Statements of 
Budgetary Resources. Second, verifying the existence and completeness 
of mission critical assets, from weapons systems to real property to 
general equipment. 

Figure 11: Current Focus on DOD's Financial Management Efforts: 

[Refer to PDF for image: slide] 

Source: GAO. 

[End of figure] 

Budgetary and asset-accountability information is widely used by DOD 
managers at all levels, so its reliability is vital to daily operations 
and management. The Marine Corps has just begun an audit of its fiscal 
year 2010 Statement of Budgetary Resources, and DOD is treating this as 
a test case. If the Marine Corps audit is successful, it will be used 
as a model for the other services. 

We and the comptroller agree that DOD's current financial management 
priorities are necessary and critical to improving accountability and 
information for operations. When it comes to assets, DOD certainly 
needs to provide accountability over the existence and completeness of 
those items. GAO believes it may be worthwhile to revisit the question 
of how DOD reports assets in its financial statements because the 
traditional financial reporting model was not designed to address the 
unique aspects of military assets. 

DOD components are developing detailed plans to support efforts to 
improve financial management in budgetary reporting and related 
operational processes and accountability for asset existence and 
completion. Based on what we have seen of the plan so far, we believe 
this prioritization is a reasonable approach for now. A consistent 
focus may increase the Department's ability to show incremental 
progress toward achieving auditability in the short term. In response 
to GAO's recommendations, the department has also put in place a 
process to improve standardization and comparability across components. 
The success of this process will depend on top management support, as 
well as high-quality planning and effective implementation at all 

Overall, we are encouraged by DOD's renewed attempt to improve its 
financial management and achieve accountability for its expenses and 
assets. GAO will continue to monitor progress and provide feedback on 
the status of those efforts. Among other things, we will seek to 
determine the reasonableness of efforts to achieve stated objectives 
and identify any gaps in strategic planning and coordination among the 
components. We will also track the progress of DOD's remediation plans 
for the remaining financial management areas. At some point down the 
road, I expect GAO and others will become involved in discussions about 
how DOD should be recording assets for financial statement purposes. 

I should stress that financial management improvement efforts are also 
pivotal to achieving broader business transformation goals. Accurate, 
timely, and useful financial management information is essential for 
sound management analysis, decision making, and reporting. 

Concluding Remarks: 

In closing, I want to reiterate that DOD has a real opportunity in the 
days ahead to set a new course for the future, take concrete steps to 
correct longstanding problems, and achieve meaningful results that can 
materially improve business performance. Given our nation's growing 
fiscal and other challenges, the Department cannot afford to delay 
addressing inefficiencies in its business operations and free up 
resources for higher priorities. The old ways of doing business, 
without regard to cost or outcome, are truly unsustainable. 

In so many areas, DOD has the ability to achieve tangible and 
sustainable outcomes that will ultimately provide better support to the 
war fighter. Success will require strong leadership that sets the tone, 
takes decisive action, and assumes accountability for results. Success 
will also depend on sound plans that set clear priorities and 
measurable goals as well as results-oriented performance measures that 
can be used to gauge progress and make adjustments. Truly, DOD will 
need to approach the transformation of its business operations with the 
same level of intensity as it plans and carries out its military 

And while focused senior-leadership and clear planning are vital, 
success in transforming DOD's business operations is not possible 
without managers such as you who are willing to rethink the status quo, 
identify opportunities for reform, and actively push for change. 
Without you, transformation is just talk. There are countless ways that 
each of you, as members of a talented and experienced workforce, can 
make a real difference in how DOD does business. 

The examples of reform that I have discussed today are really just the 
beginning. The reality is there are vast untapped opportunities to 
increase efficiency, improve effectiveness, reduce waste, and achieve 
perhaps the most important goal--to support the men and women who serve 
our country through the prudent and wise use of taxpayer dollars. 

As I said at the outset, you face a difficult set of challenges, some 
of which are long-standing and some of which are new. When we consider 
these challenges together with the recent direction set by the 
President, the Congress, and the Secretary of Defense, it is clear that 
we are at a critical juncture, one that requires thoughtful but 
decisive action. Opportunities like this come around. The problems have 
been identified and fully debated. Now it is time to let the solutions 
dominate the discussion. 

It has been a pleasure to be here today. We at GAO look forward to 
continuing to work with the Department on these important issues. 

[End of section] 


[1] GAO, Defense Acquisitions: Assessments of Selected Weapon Programs, 
(Washington, D.C.: Mar. 30, 2009. 

[2] Our analysis included secondary inventory from the U.S. Army 
Aviation and Missile Lifecycle and Management Command (AMCOM) and the 
U.S. Army TACOM Life Cycle Management Command (TACOM), but did not 
include the Army's Communication - Electronics Command (CECOM) because 
the information system used to manage secondary inventory was not able 
to provide item-specific data for the period of our review. 

[3] GAO, Contingency Contracting: DOD, State, and USAID Continue to 
Face Challenges in Tracking Contractor Personnel and Contracts in Iraq 
and Afghanistan, [hyperlink,
1] (Washington, D.C.: Oct. 1, 2009). 

[4] GAO, Contract Management: DOD Developed Draft Guidance for 
Operational Contract Support but Has Not Met All Legislative 
Requirements, [hyperlink,
114R] (Washington, D.C.: Nov. 20, 2008). 

[5] GAO, Defense Acquisitions: Fundamental Changes Are Needed to 
Improve Weapon Program Outcomes, [hyperlink,
bin/getrpt?GAO-08-1159T] (Washington, D.C.: Sept. 25, 2008) and GAO, A 
Knowledge-Based Funding Approach Could Improve Major Weapon System 
Program Outcomes, [hyperlink,
619] (Washington, D.C.: July 2, 2008). 

[6] GAO, Defense Business Transformation: A Full-time Chief Management 
Officer with a Term Appointment Is Needed at DOD to Maintain Continuity 
of Effort and Achieve Sustainable Success, [hyperlink,] (Washington, D.C.: Oct, 
16, 2007). 

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