This is the accessible text file for GAO report number GAO-04-626T 
entitled 'Department of Defense: Further Actions Needed to Establish 
and Implement a Framework for Successful Business Transformation' which 
was released on March 31, 2004.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

Testimony:

Before the Subcommittee on Terrorism, Unconventional Threats and 
Capabilities, Committee on Armed Services, U.S. House of 
Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 1:30 p.m. EST:

Wednesday, March 31, 2004:

Department of Defense:

Further Actions Needed to Establish and Implement a Framework for 
Successful Business Transformation:

Statement of Gregory D. Kutz:

Director, Financial Management and Assurance:

Randolph C. Hite:

Director, Information Technology Architecture and Systems:

GAO-04-626T:

GAO Highlights:

Highlights of GAO-04-626T, a testimony before the Subcommittee on 
Terrorism, Unconventional Threats and Capabilities, Committee on Armed 
Services, U.S. House of Representatives 

Why GAO Did This Study:

GAO has issued several reports pertaining to the Department of 
Defense’s (DOD) architecture and systems modernization efforts which 
revealed that many of the underlying conditions that contributed to 
the failure of prior DOD efforts to improve its business systems 
remain fundamentally unchanged. The Subcommittee asked GAO to provide 
its perspectives on (1) the impact long-standing financial and related 
business weaknesses continue to have on DOD, (2) the underlying causes 
of DOD business transformation challenges, and (3) DOD business 
transformation efforts. In addition, GAO reiterates the key elements 
to successful reform: (1) an integrated business transformation 
strategy, (2) sustained leadership and resource control, (3) clear 
lines of responsibility and accountability, (4) results-oriented 
performance, (5) appropriate incentives and consequences, (6) an 
enterprise architecture to guide reform efforts, and (7) effective 
monitoring and oversight. GAO also offers two suggestions for 
legislative consideration that are intended to improve the likelihood 
of meaningful, broad-based financial management and related business 
reform at DOD. 

What GAO Found:

DOD’s senior civilian and military leaders are committed to 
transforming the department and improving its business operations and 
have taken positive steps to begin this effort. However, overhauling 
the financial management and related business operations of one of the 
largest and most complex organizations in the world represents a huge 
management challenge. Six DOD program areas are on GAO’s “high risk” 
list, and the department shares responsibility for three other 
governmentwide high-risk areas. DOD’s substantial financial and 
business management weaknesses adversely affect not only its ability 
to produce auditable financial information, but also to provide 
timely, reliable information for management 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 in annual wasted resources in a 
time of increasing fiscal constraint. 

Four underlying causes impede reform: (1) lack of sustained 
leadership, (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 
keys to successful business transformation and offers two suggestions 
for legislative action. First GAO suggests that a senior management 
position be established to spearhead DOD-wide business transformation 
efforts. Second, GAO proposes that the leaders of DOD’s functional 
areas, referred to as departmentwide domains, receive and control the 
funding for system investments, as opposed to the military services. 
Domain leaders would be responsible for managing business system and 
process reform efforts within their business areas and would be 
accountable to the new senior management official for ensuring their 
efforts comply with DOD’s business enterprise architecture.

www.gao.gov/cgi-bin/getrpt?GAO-04-626T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Gregory Kutz at (202) 
512-9095 or (kutzg@gao.gov) or Randolph Hite, (202) 512-3439 
(hiter@gao.gov)

[End of section]

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to be here to discuss key aspects of business 
transformation efforts at the Department of Defense (DOD). At the 
outset, we would like to thank the Subcommittee for having this hearing 
and acknowledge the important role hearings such as this one serve. The 
involvement of this Subcommittee is critical to ultimately assuring 
public confidence in DOD as a steward that is accountable for its 
finances. DOD's substantial long-standing business management systems 
and related problems adversely affect the economy, effectiveness, and 
efficiency of its operations, and have resulted in a lack of adequate 
transparency and appropriate accountability across all major business 
areas. As a result, DOD does not have timely, reliable information for 
management to use in making informed decisions. Further, as our reports 
continue to show, these problems result in significant fraud, waste, 
and abuse and hinder DOD's attempts to develop world-class operations 
and activities to support its forces. 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 stovepiped business systems. 
The seriousness of DOD's business management weaknesses underscores the 
importance of no longer condoning "status quo" business operations at 
DOD.

Over the last 3 years, DOD has taken action to begin addressing a 
number of these challenges as part of its business transformation 
effort. Business transformation has been a priority of Secretary 
Rumsfeld. For example, DOD has been granted additional human capital 
flexibilities and is in the process of developing a new personnel 
management system for its civilian employees. In addition, through its 
Business Management Modernization Program (BMMP), DOD is continuing its 
efforts to develop and implement a business enterprise architecture and 
establish effective management and control over its business system 
modernization investments. To date, however, the underlying operational 
conditions remain fundamentally unchanged and tangible evidence of 
improvements in DOD business operations remains limited to specific 
business process areas, such as DOD's purchase card program, where 
improvements have generally resulted from increased management focus 
and better internal control rather than from major modifications to 
automated systems. It is important to note that some of the key 
elements we highlight in this testimony as necessary for successful 
business transformation were critical to the success of several of the 
interim initiatives that we will discuss today.

Because DOD is one of the largest and most complex organizations in the 
world, overhauling its business operations represents a huge management 
challenge. In fiscal year 2003, DOD reported that its operations 
involved over $1 trillion in assets, nearly $1.6 trillion in 
liabilities, approximately 3.3 million military and civilian personnel, 
and disbursements of over $416 billion. Moreover, execution of DOD 
operations spans a wide range of defense organizations, including the 
military services and their respective major commands and functional 
activities, numerous large defense agencies and field activities, and 
various combatant and joint operational commands that are responsible 
for military operations for specific geographic regions or theaters of 
operations. To execute these military operations, the department 
performs an assortment of interrelated and interdependent business 
process areas, including logistics management, procurement, healthcare 
management, and financial management. Secretary Rumsfeld has estimated 
that successful improvements to DOD's business operations could save 
the department 5 percent of its budget a year. Using DOD's reported 
fiscal year 2004 budget authority amounts, this percentage would equate 
to approximately $22 billion a year in savings.

Over the last 3 years, we have made a series of recommendations to DOD 
and suggestions for legislative changes that provide a framework for 
effectively addressing the challenges DOD faces in transforming its 
financial management and related business operations and systems and 
offered several key elements necessary for reform to succeed.[Footnote 
2] This framework recognizes the complexity of the challenge and the 
long-term nature of overcoming it. Moreover, it recognizes the 
underlying causes of the challenge, such as lack of sustained 
leadership, cultural resistance to change, parochialism, and stovepiped 
operations, that impeded the success of previous administrations in 
addressing DOD's problems that continue today. DOD has agreed with our 
recommendations and launched efforts intended to implement them, but 
progress has been slow. If DOD is unable to address these underlying 
causes that have resulted in the failure of previous broad-based reform 
efforts, improvements will remain marginal, confined to narrowly 
defined business process areas and incremental improvements in human 
capital policies, business processes, internal control systems, and 
information technologies.

Today, we will provide our perspectives on (1) the impact that long-
standing financial management and related business process weaknesses 
continue to have on DOD, (2) underlying causes that have impeded the 
success of prior efforts, (3) keys to successful reform, and (4) DOD's 
business transformation efforts. In addition, we will offer two 
suggestions for legislative consideration, which we believe will 
provide the sustained top-level leadership and accountability necessary 
for the business transformation effort to succeed. Our statement is 
based on previous GAO reports as well as on our review of the work of 
other DOD auditors and recent DOD reports and studies.

Impact of Financial Management and Related Business Process Weaknesses:

For several years we have reported that DOD faces a range of financial 
management and related business process challenges that are complex, 
long-standing, pervasive, and deeply rooted in virtually all business 
operations throughout the department. As the Comptroller General 
recently testified and as discussed in our latest financial audit 
report,[Footnote 3] DOD's financial management deficiencies, taken 
together, continue to represent the single largest obstacle to 
achieving an unqualified opinion on the U.S. government's consolidated 
financial statements. 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.

In identifying improved financial performance as one of its five 
governmentwide initiatives, the President's Management Agenda 
recognized that obtaining a clean (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 4] 
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 5] Unfortunately, DOD does 
not meet any of these conditions. For example, for fiscal year 2003, 
the DOD Inspector General (DOD IG) 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, as the following 
examples illustrate.

* Four hundred and fifty of the 481 mobilized Army National Guard 
soldiers from six GAO case study Special Forces and Military Police 
units[Footnote 6] had at least one pay problem associated with their 
mobilization. DOD's inability to provide timely and accurate payments 
to these soldiers, many of whom risked their lives in recent Iraq or 
Afghanistan missions, distracted them from their missions, imposed 
financial hardships on the soldiers and their families, and has had a 
negative impact on retention. (GAO-04-89, Nov. 13, 2003):

* 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 
activities, 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. 
(GAO-04-305R, Dec. 18, 2003):

* Inadequate asset visibility and accountability resulted in DOD 
selling new Joint Service Lightweight Integrated Suit Technology 
(JSLIST)--the current chemical and biological protective garment used 
by our military forces--on the internet for $3 each (coat and trousers) 
while at the same time buying them for over $200 each. DOD has 
acknowledged that these garments should have been restricted to DOD use 
only and therefore should not have been available to the public. (GAO-
02-873T, June 25, 2002):

* Inadequate asset accountability also resulted in DOD's inability to 
locate and remove over 250,000 defective Battle Dress Overgarments 
(BDOs)--the predecessor of JSLIST--from its inventory. 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. (GAO-04-15NI, Nov. 19, 2003):

* Tens of millions of dollars are not being collected each year by 
military treatment facilities from third-party insurers because key 
information required to effectively bill and collect from third-party 
insurers is often not properly collected, recorded, or used by the 
military treatment facilities. (GAO-04-322R, Feb. 20, 2004):

* Our analysis of data on more than 50,000 maintenance work orders 
opened during the deployments of six battle groups indicated that about 
29,000 orders (58 percent) could not be completed because the needed 
repair parts were not available on board ship. This condition was a 
result of inaccurate ship configuration records and incomplete, 
outdated, or erroneous historical parts demand data. Such problems not 
only have a detrimental impact on mission readiness, they may also 
increase operational costs due to delays in repairing equipment and 
holding unneeded spare parts inventory. (GAO-03-887, Aug. 29, 2003):

* DOD sold excess biological laboratory equipment, including a 
biological safety cabinet, a bacteriological incubator, a centrifuge, 
and other items that could be used to produce biological warfare 
agents. Using a fictitious company and fictitious individual 
identities, we were able to purchase a large number of new and usable 
equipment items over the Internet from DOD. Although the production of 
biological warfare agents requires a high degree of expertise, the ease 
with which these items were obtained through public sales increases the 
risk that terrorists could obtain and use them to produce biological 
agents that could be used against the United States. (GAO-04-81TNI, 
Oct. 7, 2003):

* Based on statistical sampling, we estimated that 72 percent of the 
over 68,000 premium class airline tickets DOD purchased for fiscal 
years 2001 and 2002 was not properly authorized and that 73 percent was 
not properly justified. During fiscal years 2001 and 2002, DOD spent 
almost $124 million on premium class tickets that included at least one 
leg in premium class--usually business class. Because each premium 
class ticket cost the government up to thousands of dollars more than a 
coach class ticket, unauthorized premium class travel resulted in 
millions of dollars of unnecessary costs being incurred annually. (GAO-
04-229T, Nov. 6, 2003):

* Some DOD contractors have been abusing the federal tax system with 
little or no consequence, and DOD is not collecting as much in unpaid 
taxes as it could. Under the Debt Collection Improvement Act of 1996, 
DOD is responsible--working with the Treasury Department--for 
offsetting payments made to contractors to collect funds owed, such as 
unpaid federal taxes. However, we found that DOD had collected only 
$687,000 of unpaid taxes as of September 2003. We estimated that at 
least $100 million could be collected annually from DOD contractors 
through effective implementation of levy and debt collection programs. 
(GAO-04-95, Feb. 12, 2004):

* Our review of fiscal year 2002 data revealed that about $1 of every 
$4 in contract payment transactions in DOD's Mechanization of Contract 
Administration Services (MOCAS) system was for adjustments to 
previously recorded payments--$49 billion of adjustments out of $198 
billion in disbursement, collection, and adjustment transactions. 
According to DOD, the cost of researching and making adjustments to 
accounting records was about $34 million in fiscal year 2002, primarily 
to pay hundreds of DOD and contractor staff. (GAO-03-727, Aug. 8, 
2003):

* DOD's information technology (IT) budget submission to Congress for 
fiscal year 2004 contained material inconsistencies, inaccuracies, or 
omissions that limited its reliability. For example, we identified 
discrepancies totaling about $1.6 billion between two primary parts of 
the submission--the IT budget summary report and the detailed Capital 
Investments Reports on each IT initiative. These problems were largely 
attributable to insufficient management attention and limitations in 
departmental policies and procedures, such as guidance in DOD's 
Financial Management Regulation, and to shortcomings in systems that 
support budget-related activities. (GAO-04-115, Dec. 19, 2003):

* Since the mid 1980s, we have reported that DOD uses overly optimistic 
planning assumptions to estimate its annual budget request. These same 
assumptions are reflected in its Future Years Defense Program, which 
reports projected spending for the current budget year and at least 4 
succeeding years. In addition, in February 2004 the Congressional 
Budget Office projected that DOD's demand for resources could grow to 
about $490 billion in fiscal year 2009. DOD's own estimate for that 
same year was only $439 billion.[Footnote 7] As a result of DOD's 
continuing use of optimistic assumptions, DOD has too many programs for 
the available dollars, which often leads to program instability, costly 
program stretch-outs, and program termination. Over the past few years, 
the mismatch between programs and budgets has continued, particularly 
in the area of weapons systems acquisition. 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.[Footnote 8] (GAO-03-98, 
January 2003):

These examples clearly demonstrate not only the severity of DOD's 
current problems, but also the importance of business systems 
modernization as a critical element in the department's transformation 
efforts to improve the economy, efficiency, and effectiveness of it's 
operations, and to provide for transparency and accountability to 
Congress and American taxpayers.

Underlying Causes of Financial and Related Business Process 
Transformation Challenges:

Since May 1997,[Footnote 9] we have highlighted in various testimonies 
and reports what we believe are the underlying causes of the 
department's inability to resolve its long-standing financial 
management and related business management weaknesses and fundamentally 
reform its business operations. We found that one or more of these 
causes were contributing factors to the financial management and 
related business process weaknesses we just described. Over the years, 
the department has undertaken many initiatives intended to transform 
its business operations departmentwide and improve the reliability of 
information for decision making and reporting but has not had much 
success because it has not addressed the following four underlying 
causes:

* a lack of sustained top-level leadership and management 
accountability for correcting problems;

* deeply embedded cultural resistance to change, including military 
service parochialism and stovepiped operations;

* a lack of results-oriented goals and performance measures and 
monitoring; and:

* inadequate incentives and accountability mechanisms relating to 
business transformation efforts.

If not properly addressed, these root causes will likely result in the 
failure of current DOD initiatives.

Lack of Sustained Leadership and Adequate Accountability:

DOD has not routinely assigned accountability for performance to 
specific organizations or individuals who have sufficient authority to 
accomplish desired goals. For example, under the Chief Financial 
Officers Act of 1990,[Footnote 10] it is the responsibility of the 
agency Chief Financial Officer (CFO) to establish the mission and 
vision for the agency's future financial management and to direct, 
manage, and provide oversight of financial management operations. 
However, at DOD, the Comptroller--who is by statute the department's 
CFO--has direct responsibility for only an estimated 20 percent of the 
data relied on to carry out the department's financial management 
operations. The other 80 percent comes from DOD's other business 
operations and is under the control and authority of other DOD 
officials.

In addition, DOD's past experience has suggested that top management 
has not had a proactive, consistent, and continuing role in integrating 
daily operations for achieving 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. While the current DOD leadership, such as the Secretary, 
Deputy Secretary, and Comptroller, have certainly demonstrated their 
commitment to reforming the department, the magnitude and nature of 
day-to-day demands placed on these leaders following the events of 
September 11, 2001, clearly affect the level of oversight and 
involvement in business transformation efforts that these leaders can 
sustain. Given the importance of DOD's business transformation effort, 
it is imperative that it receive the sustained leadership needed to 
improve the economy, efficiency, and effectiveness of DOD's business 
operations. Based on our surveys of best practices of world-class 
organizations,[Footnote 11] strong executive CFO and Chief Information 
Officer (CIO) leadership and centralized control over systems 
investments are essential to (1) making financial management an 
entitywide priority, (2) providing meaningful information to decision 
makers, (3) building a team of people that delivers results, and (4) 
effectively leveraging technology to achieve stated goals and 
objectives.

Cultural Resistance and Parochialism:

Cultural resistance to change, military service parochialism, and 
stovepiped operations have all contributed significantly to the failure 
of previous attempts to implement broad-based management reforms at 
DOD. The department has acknowledged that it confronts decades-old 
problems deeply grounded in the bureaucratic history and operating 
practices of a complex, multifaceted organization. Recent audits reveal 
that DOD has made only small inroads in addressing these challenges. 
For example, the Bob Stump National Defense Authorization Act for 
Fiscal Year 2003[Footnote 12] requires the DOD Comptroller to determine 
that each financial system improvement meets the specific conditions 
called for in the act before DOD obligates funds in amounts exceeding 
$1 million. However, we found that most system improvement efforts 
involving obligations over $1 million were not reviewed by the DOD 
Comptroller for the purpose of making that determination and that DOD 
continued to lack a mechanism for proactively identifying system 
improvement initiatives. We asked for, but DOD did not provide, 
comprehensive data for obligations in excess of $1 million for business 
system modernization. Based on a comparison of the limited information 
available for fiscal years 2003 and 2004, we identified $479 million in 
reported obligations by the military services that were not submitted 
to the DOD Comptroller for review.

In addition, in September 2003,[Footnote 13] we reported that DOD 
continued to use a stovepiped approach to develop and fund its business 
system investments. Specifically, we found that DOD components receive 
and control funding for business systems investments without being 
subject to the scrutiny of the DOD Comptroller. DOD's ability to 
address its current "business-as-usual" approach to business system 
investments is further hampered by its lack of (1) a complete inventory 
of business systems (a condition we first highlighted in 1998), (2) a 
standard definition of what constitutes a business system, (3) a well-
defined enterprise architecture, and (4) an effective approach for the 
control and accountability over business system investments. Until DOD 
develops and implements an effective strategy for overcoming 
resistance, parochialism, and stovepiped operations, its 
transformation efforts will not be successful.

Lack of Results-Oriented Goals and Performance Measures:

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. However, DOD has not yet established 
measurable, results-oriented goals to evaluate BMMP's cost, schedule 
and performance outcomes and results, or explicitly defined performance 
measures to evaluate the architecture quality, content, and utility of 
subsequent major updates to its initial business enterprise 
architecture (BEA). For example, in our September 2003 report,[Footnote 
14] we stated that DOD had not defined specific plans outlining how it 
intends to extend and evolve the initial BEA to include the missing 
scope and details that we identified. Instead, DOD's primary BEA goal 
was to complete as much of the architecture as it could within a set 
period of time. According to DOD, it intends to refine the initial BEA 
through at least six different major updates of its architecture 
between February 2004 and the second quarter of 2005. However, it 
remains unclear what these major updates will individually or 
collectively provide and how they contribute to achieving DOD's goals.

DOD recognizes that it needs to define measurable goals and performance 
measures:

In its March 15, 2004, progress report to defense congressional 
committees on the status of BMMP's business transformation efforts, DOD 
reported that it plans to establish an initial approved program 
baseline to evaluate the cost, schedule, and performance of the BMMP. 
Given that DOD has reported disbursements of $111 million since 
development efforts began in fiscal year 2002, it is critical that it 
establish meaningful, tangible, and measurable program goals and 
objectives--short-term and long-term.

Until DOD develops and implements clearly defined results-oriented 
goals for the overall program, including the architecture content of 
each major update of its architecture, the department will continue to 
lack a clear measure of the BMMP's progress in transforming the 
department's business operations and in providing the Congress 
reasonable assurance that funds are being directed towards resolving 
the department's long-standing business operational problems.

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 incentives 
for making more than incremental change 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 changed behavior have been minimal or 
nonexistent.

The lack of incentive to change is evident in the business systems 
modernization area. Despite DOD's acknowledgement that many of its 
systems are error prone, duplicative, and stovepiped, DOD continues to 
allow its component organizations to make their own investments 
independently of one another and implement different system solutions 
to solve the same business problems. These stovepiped decision-making 
processes have contributed to the department's current complex, error-
prone environment. The DOD Comptroller recently testified that DOD's 
actual systems inventory could be twice as many as the number of 
systems the department currently recognizes as its systems inventory. 
In March 2003, we reported that ineffective program management and 
oversight, as well as a lack of accountability, resulted in DOD 
continuing to invest hundreds of millions of dollars in system 
modernization efforts without any assurance that the projects will 
produce operational improvements commensurate with the amount 
invested.[Footnote 15]

For example, the estimated cost of one of the business system 
investment projects that we reviewed increased by as much as $274 
million, while its schedule slipped by almost 4 years. After spending 
$126 million, DOD terminated that project in December 2002, citing poor 
performance and increasing costs. GAO and the DOD IG have identified 
numerous business system modernization efforts that are not 
economically justified on the basis of cost, benefits and risk; take 
years longer than planned; and fall short of delivering planned or 
needed capabilities. Despite this track record, DOD continues to 
increase spending on business systems while at the same time it lacks 
the effective management and oversight needed to achieve real results. 
Without appropriate incentives to improve their project management, 
ongoing oversight, and adequate accountability mechanisms, 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) break down 
parochialism and reward behaviors that meet DOD-wide goals, (2) develop 
incentives that motivate decision makers to initiate and implement 
efforts that are consistent with better program outcomes, including 
saying "no" or pulling the plug early on a system or program that is 
failing, and (3) facilitate a congressional focus on results-oriented 
management, particularly with respect to resource allocation decisions.

Keys to Successful Reform:

As we have previously reported,[Footnote 16] and the success of the 
more narrowly defined DOD initiatives we will discuss later illustrate, 
the following key elements collectively will enable the department to 
effectively address the underlying causes of its inability to resolve 
its long-standing financial and business management problems. These 
elements are:

* 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 and committed 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 
accountability;

* incorporating results-oriented performance measures and monitoring 
progress tied to key financial and business transformation objectives;

* providing appropriate incentives or consequences for action or 
inaction;

* 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 and are consistent 
with those actions discussed in the department's April 2001 financial 
management transformation report.[Footnote 17] 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 has been slow.

DOD Business Transformation Efforts:

Over the years, we have given DOD credit for beginning numerous 
initiatives intended to improve its business operations. Unfortunately, 
most of these initiatives failed to achieve their intended objective in 
part, we believe, because they failed to incorporate key elements that 
in our experience are critical to successful reform. Today, we would 
like to discuss one very important broad-based initiative, the BMMP, 
DOD currently has underway that, if properly developed and implemented, 
will result in significant improvements in DOD's business operations. 
Within the next few months we intend to issue a report on the status of 
DOD's efforts to refine and implement its enterprise architecture and 
the results of our review of two on going DOD system initiatives. In 
addition to the BMMP, DOD has undertaken several interim initiatives in 
recent years that have resulted in tangible, although limited, 
improvements. We believe that these tangible improvements were possible 
because DOD has accepted our recommendations and incorporated many of 
the key elements critical for reform. Furthermore, we would like to 
offer two suggestions for legislative consideration that we believe 
could significantly increase the likelihood of a successful business 
transformation effort at DOD.

Business Management Modernization Program:

The BMMP, which the department established in July 2001 following our 
recommendation that DOD develop and implement an enterprise 
architecture, is vital to the department's efforts to transform its 
business operations.[Footnote 18] The purpose of the BMMP is to oversee 
development and implementation of a departmentwide BEA, transition 
plan, and related efforts to ensure that DOD business system 
investments are consistent with the architecture. A well-defined and 
properly implemented BEA can provide assurance that the department 
invests in integrated enterprisewide business solutions and, 
conversely, can help move resources away from nonintegrated business 
system development efforts. As we reported in July 2003,[Footnote 19] 
DOD had developed an initial version of its departmentwide architecture 
for modernizing its current financial and business operations and 
systems and had expended tremendous effort and resources in doing so. 
However, substantial work remains before the architecture will be 
sufficiently detailed and the means for implementing it will be 
adequately established to begin to have a tangible impact on improving 
DOD's overall business operations. We 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 effort.

On the positive side, during its initial efforts to develop the 
architecture, the department established some of the architecture 
management capabilities advocated by best practices and federal 
guidance,[Footnote 20] such as establishing a program office, 
designating a chief architect, and using an architecture development 
methodology and automated tool. Further, DOD's initial version of its 
business enterprise architecture provided a foundation on which to 
build and ultimately produce a well-defined business enterprise 
architecture. For example, in September 2003,[Footnote 21] we reported 
that the "To Be" descriptions address, to at least some degree, how DOD 
intends to operate in the future, what information will be needed to 
support these future operations, and what technology standards should 
govern the design of future systems.

While some progress has been made, DOD has not yet taken important 
steps that are critical to its ability to successfully use the 
enterprise architecture to drive reform throughout the department's 
overall business operations. For example, DOD has not yet defined and 
implemented the following.

* Detailed plans to extend and evolve its initial architecture to 
include the missing scope and detail required by the Bob Stump National 
Defense Authorization Act for Fiscal Year 2003 and other relevant 
architectural requirements. Specifically, (1) the initial version of 
the BEA excluded some relevant external requirements, such as 
requirements for recording revenue, and lacked or provided little 
descriptive content pertaining to its "As Is" and "To Be" environments 
and (2) DOD had not yet developed the transition plan needed to provide 
a temporal road map for moving from the "As Is" to the "To Be" 
environment.

* An effective approach to select and control business system 
investments[Footnote 22] for obligations exceeding $1 million. As we 
previously stated, and it bears repeating here, DOD components 
currently receive direct funding for their business systems and 
continue to make their own parochial decisions regarding those 
investments without having received the scrutiny of the DOD Comptroller 
as required by the Bob Stump National Defense Authorization Act for 
Fiscal Year of 2003. Later, we will offer a suggestion for improving 
the management and oversight of the billions of dollars DOD invests 
annually in business systems.

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 approximately $18.8 billion[Footnote 23]--$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 its own funding for IT 
investments.

However, as we reported,[Footnote 24] DOD lacked an efficient and 
effective process for managing, developing, and implementing its 
business systems. These long-standing problems continue despite the 
significant investments in business systems by DOD components each 
year. For example, in March 2003 we reported that DOD's oversight of 
four DFAS projects we reviewed had been ineffective.[Footnote 25] 
Investment management responsibility for the four projects rested with 
the Defense Finance and Accounting Service (DFAS), the DOD Comptroller, 
and the DOD CIO. In discharging this responsibility, each had allowed 
project investments to continue year after year, even through the 
projects had been marked by cost increases, schedule slippages, and 
capability changes. As a result DOD had invested approximately $316 
million in four DFAS system modernization projects without 
demonstrating that this substantial investment would markedly improve 
DOD financial management information for decision making and financial 
reporting purposes.

Specifically, we found that four DFAS projects reviewed lacked an 
approved economic analysis that reflected the fact that expected 
project costs had increased, while in some cases the benefits had 
decreased. For instance as we previously stated, the estimated cost of 
one project--referred to as the Defense Procurement Payment System 
(DPPS)--had increased by as much as $274 million, while its schedule 
slipped by almost 4 years. Such project analyses provide the requisite 
justification for decision makers to use in determining whether to 
invest additional resources in anticipation of receiving commensurate 
benefits and mission value. For each of the four projects we reviewed 
we found that DOD oversight entities--DFAS, the DOD Comptroller, and 
the DOD CIO--did not question the impact of the cost increases and 
schedule delays, and allowed the projects to proceed in the absence of 
the requisite analytical justification. Furthermore, in one case, they 
allowed a project estimated to cost $270 million, referred to as the 
DFAS Corporate Database/DFAS Corporate Warehouse (DCD/DCW), to proceed 
without an economic analysis. In another case, they allowed DPPS to 
continue despite known concerns about the validity of the project's 
economic analysis.

DOD subsequently terminated two--DPPS and the Defense Standard 
Disbursing System (DSDS)--of the four DFAS system modernization 
projects reviewed. As we previous mentioned, DPPS was terminated due to 
poor program performance and increasing costs after 7 years of effort 
and an investment of over $126 million. DFAS terminated DSDS after 
approximately 7 years of effort and an investment of about $53 million, 
noting that a valid business case for continuing the effort could not 
be made. These two terminated projects were planned to provide DOD the 
capability to address some of DOD's long-standing contract and vendor 
payment problems.

In addition to project management issues that continue to result in 
systems that do not perform as expected and cost more than planned, we 
found that DOD continues to lack a complete and reliable inventory of 
its current systems. In September 2003, we reported that DOD had 
created a repository of information about its existing systems 
inventory of approximately 2,300 business systems (up from 1,731 in 
October 2002) as part of its ongoing business systems modernization 
program, and consistent with our past recommendation.[Footnote 26] Due 
to its lack of visibility over systems departmentwide, DOD had to rely 
upon data calls to obtain its information. 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 and complete. In fact, the DOD Comptroller testified last week 
before the Senate Armed Services Subcommittee on Readiness and 
Management Support that the size of DOD's actual systems inventory 
could be twice the size currently reported. This lack of visibility 
over current business systems in use throughout the department hinders 
DOD's ability to identify and eliminate duplicate and nonintegrated 
systems and transition to its planned systems environment in an 
efficient and effective manner.

Of the 2,274 business systems recorded in DOD's systems inventory 
repository, the department reportedly has 665 systems to support human 
resource management, 565 systems to support logistical functions, 542 
systems to perform finance and accounting functions, and 210 systems to 
support strategic planning and budget formulation. Table 1, which 
presents the composition of DOD business systems by functional area, 
reveals the numerous and redundant systems operating in the department 
today.

Table 1: Reported DOD Business Systems by Domain and Functional Area:

Domain: Acquisition; 
Air Force: 27; 
Army: 31; 
Navy/ Marine Corps: 61; 
DFAS: 3; 
Other: 21; 
Total: 143.

Domain: Accounting and finance; 
Air Force: 43; 
Army: 88; 
Navy/ Marine Corps: 195; 
DFAS: 165; 
Other: 51; 
Total: 542.

Domain: Human resource management; 
Air Force: 71; 
Army: 387; 
Navy/ Marine Corps: 86; 
DFAS: 33; 
Other: 88; 
Total: 665.

Domain: Installations and environment; 
Air Force: 12; 
Army: 98; 
Navy/ Marine Corps: 9; 
DFAS: 1; 
Other: 8; 
Total: 128.

Domain: Logistics; 
Air Force: 180; 
Army: 191; 
Navy/ Marine Corps: 104; 
DFAS: 11; 
Other: 79; 
Total: 565.

Domain: Strategic planning and budgeting; 
Air Force: 23; 
Army: 63; 
Navy/ Marine Corps: 98; 
DFAS: 15; 
Other: 11; 
Total: 210.

Domain: Enterprise information environment; 
Air Force: 1; 
Army: 5; 
Navy/ Marine Corps: 2; 
DFAS: 3; 
Other: 10; 
Total: 21.

Domain: Total; 
Air Force: 357; 
Army: 863; 
Navy/ Marine Corps: 555; 
DFAS: 231; 
Other: 268; 
Total: 2,274. 

Source: GAO analysis of BMMP data.

[End of table]

As we have previously reported,[Footnote 27] these numerous systems 
have evolved into the overly complex and error-prone operation that 
exists today, including (1) little standardization across DOD 
components, (2) multiple systems performing the same tasks, (3) the 
same data stored in multiple systems, (4) manual data entry into 
multiple systems, and (5) a large number of data translations and 
interfaces that combine to exacerbate problems with data integrity. The 
department has recognized the uncontrolled proliferation of systems and 
the need to eliminate as many systems as possible and integrate and 
standardize those that remain. In fact, the two terminated DFAS 
projects were intended to reduce the number of systems or eliminate a 
portion of different systems that perform the same function. For 
example, DPPS was intended to consolidate eight contract and vendor pay 
systems and DSDS was intended to eliminate four different disbursing 
systems.

Until DOD completes its efforts to refine and implement its enterprise 
architecture and transition plan, and develop and implement an 
effective approach for selecting and controlling business system 
investments, DOD will continue to lack (1) a comprehensive and 
integrated strategy to guide its business process and system changes, 
and (2) results-oriented measures to monitor and measure progress, 
including whether system development and modernization investment 
projects adequately incorporate leading practices used by the private 
sector and federal requirements and achieve performance and efficiency 
commensurate with the cost. These elements are critical to the success 
of DOD's BMMP.

Developing and implementing a BEA for an organization as large and 
complex as DOD is a formidable challenge, but it is critical to 
effecting the change required to achieve the Secretary's vision of 
relevant, reliable, and timely financial and other management 
information to support the department's vast operations. As mandated, 
we plan to continue to report on DOD's progress in developing the next 
version of its architecture, developing its transition plan, validating 
its "As Is" systems inventory, and controlling its system investments.

Interim Initiatives:

Since DOD's overall business process transformation is a long-term 
effort, in the interim it is important for the department to focus on 
improvements that can be made using, or requiring only minor changes 
to, existing automated systems and processes. As demonstrated by the 
examples we will highlight in this testimony, leadership, real 
incentives, accountability, and oversight and monitoring--key elements 
to successful reform--have brought about improvements in some DOD 
operations, such as more timely commercial payments, reduced payment 
recording errors, and significant reductions in individually billed 
travel card delinquency rates.

To help achieve the department's goal of improved financial 
information, the DOD Comptroller has 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 Comptroller is 
planning to cascade the performance measures down to the military 
services and defense agency financial communities, along with certain 
specific reporting requirements. DOD has also developed a Web site 
where implementation information and monthly indicator updates will be 
made available for the financial communities' review. At the 
departmentwide level, certain financial metrics will be 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' Director and DOD's Comptroller, 
have reported improvements, including the following.

* From April 2001 to January 2004, DOD reduced its commercial pay 
backlogs (payment delinquencies) by 55 percent.

* From March 2001 to December 2003, DOD reduced its payment recording 
errors by 33 percent.

* The delinquency rate for individually billed travel cards dropped 
from 18.4 percent in January 2001 to 10.7 percent in January 2004.

Using DFAS' 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, 
statistics for the last few months show that progress has slowed or 
even taken a few steps backward for payment recording errors and 
commercial pay backlogs. Our report last year on DOD's metrics 
program[Footnote 28] included a caution that, without modern integrated 
systems and the streamlined processes they engender, reported progress 
may not be sustainable if workload is increased.

Since we reported problems with DOD's purchase card program, DOD and 
the military services have taken actions to address all of our 109 
recommendations. In addition, we found that DOD and the military 
services took action to improve the purchase card program consistent 
with the requirements of the Bob Stump National Defense Authorization 
Act for Fiscal Year 2003 and the DOD Appropriations Act for Fiscal Year 
2003.[Footnote 29] Specifically, we found that DOD and the military 
services had done the following.

* Substantially reduced the number of purchase cards issued. According 
to GSA records, DOD had reduced the total number of purchase cards from 
about 239,000 in March 2001 to about 134,609 in January 2004. These 
reductions have the potential to significantly improve the management 
of this program.

* Issued policy guidance to field activities to (1) perform periodic 
reviews of all purchase card accounts to reestablish a continuing bona 
fide need for each card account, (2) cancel accounts that were no 
longer needed, and (3) devise additional controls over infrequently 
used accounts to protect the government from potential cardholder or 
outside fraudulent use.

* Issued disciplinary guidelines, separately, for civilian and military 
employees who engage in improper, fraudulent, abusive, or negligent use 
of a government charge card.

In addition, to monitor the purchase card program, 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 June 27, 2003, the DOD IG issued a report[Footnote 
30]summarizing the results of an in-depth review of purchase card 
transactions made by 1,357 purchase cardholders. The report identified 
182 cardholders who potentially used their purchase cards 
inappropriately or fraudulently.

We believe that consistent oversight played a major role in bringing 
about these improvements in DOD's purchase and travel card programs. 
During 2001, 2002, and 2003, seven separate congressional hearings were 
held on the Army and Navy purchase and individually billed travel card 
programs. Numerous legislative initiatives aimed at improving DOD's 
management and oversight of these programs also had a positive impact.

Another important initiative underway at the department pertains to 
financial reporting. Under the leadership of DOD Comptroller, the 
department is working to instill discipline into its financial 
reporting processes to improve the reliability of the department's 
financial data. Resolution of serious financial management and related 
business management weaknesses is essential to achieving any opinion on 
the DOD consolidated financial statements. Pursuant to the requirements 
in section 1008 of the National Defense Authorization Act for Fiscal 
Year 2002,[Footnote 31] DOD has reported for the past 3 years on the 
reliability of the department's financial statements, concluding that 
the department is not able to provide adequate evidence supporting 
material amounts in its financial statements. Specifically, DOD stated 
that it was unable to comply with applicable financial reporting 
requirements for (1) property, plant, and equipment, (2) inventory and 
operating materials and supplies, (3) environmental liabilities, (4) 
intragovernmental eliminations and related accounting entries, (5) 
disbursement activity, and (6) cost accounting by responsibility 
segment. Although DOD represented that the military retirement health 
care liability data had improved for fiscal year 2003, the cost of 
direct health care provided by DOD-managed military treatment 
facilities was a significant amount of DOD's total recorded health care 
liability and was based on estimates for which adequate support was not 
available. DOD has indicated that by acknowledging its inability to 
produce reliable financial statements, as required by the act, the 
department saves approximately $23 million a year through reduction in 
the level of resources needed to prepare and audit financial 
statements. However, DOD has set the goal of obtaining a favorable 
opinion on its fiscal year 2007 departmentwide financial statements. To 
this end, DOD components and agencies have been tasked with addressing 
material line item deficiencies in conjunction with the BMMP. This is 
an ambitious goal and we have been requested by Congress to review the 
feasibility and cost effectiveness of DOD's plans for obtaining such an 
opinion within the stated time frame.

To instill discipline in its financial reporting process, 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. We have 
observed several of these briefings and have noted that the practice of 
preparing and explaining interim financial statements has led to the 
discovery and correction of numerous recording and reporting errors.

If DOD continues to provide for active leadership, along with 
appropriate incentives and accountability mechanisms, improvements 
will continue to occur in its programs and initiatives.

Suggestions for Legislative Consideration:

We would like to offer two suggestions for legislative consideration 
that we believe could contribute significantly to the department's 
ability to not only address the impediments to DOD success but also to 
incorporate needed key elements to successful reform. These suggestions 
would include the creation of a chief management official and the 
centralization of responsibility and authority for business system 
investment decisions with the domain[Footnote 32] leaders responsible 
for the department's various business areas, such as logistics and 
human resource management.

Chief Management Official:

Previous failed attempts to improve DOD's business operations 
illustrate the need for sustained involvement of DOD leadership in 
helping to assure that the DOD's financial and overall business process 
transformation efforts remain a priority. While the Secretary and other 
key DOD leaders have certainly demonstrated their commitment to the 
current business transformation efforts, the 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 sound strategic planning is the foundation upon which to build, 
sustained leadership is needed to maintain the continuity needed for 
success. 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 management official who would serve as the 
Principal Under Secretary of Defense for Management.[Footnote 33] This 
position would provide the sustained attention essential for addressing 
key stewardship responsibilities such as strategic planning, 
performance and financial management, and business systems 
modernization in an integrated manner, while also facilitating the 
overall business transformation operations within DOD. This 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. 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 potentially administrations, 
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 overall 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.

Central Control Over System Investments:

We have made numerous recommendations to DOD intended to improve the 
management oversight and control of its business systems investments. 
However, as previously mentioned, progress in achieving this control 
has been slow and, as a result, DOD has little or no assurance that 
current business systems investments are being spent in an economically 
efficient and effective manner. DOD's current systems funding process 
has contributed to the evolution of an overly complex and error-prone 
information technology environment containing duplicative, 
nonintegrated, and stovepiped systems. Given that DOD plans to spend 
approximately $19 billion on business systems and related 
infrastructure for fiscal year 2004--including an estimated $5 billion 
in modernization money--it is critical that actions be taken to gain 
more effective control over such business systems funding.

The second suggestion we have for legislative action to address this 
issue, consistent with our open recommendations to DOD, is to establish 
specific management oversight, accountability, and control of funding 
with the "owners" of the various functional areas or domains. This 
legislation would define the scope of the various business areas (e.g., 
acquisition, logistics, finance and accounting) and establish 
functional responsibility for management of the portfolio of business 
systems in that area with the relevant Under Secretary of Defense for 
the six departmental domains and the CIO for the Enterprise Information 
Environment Mission (information technology infrastructure). For 
example, planning, development, acquisition, and oversight of DOD's 
portfolio of logistics business systems would be vested in the Under 
Secretary of Defense for Acquisition, Technology, and Logistics.

We believe it is critical that funds for DOD business systems be 
appropriated to the domain owners in order to provide for 
accountability, transparency, and the ability to prevent the continued 
parochial approach to systems investment that exists today. The domains 
would establish a hierarchy of investment review boards with DOD-wide 
representation, including the military services and Defense agencies. 
These boards would be responsible for reviewing and approving 
investments to develop, operate, maintain, and modernize business 
systems for the domain portfolio, including ensuring that investments 
were consistent with DOD's BEA. All domain owners would be responsible 
for coordinating their business systems investments with the chief 
management official who would chair the Defense Business Systems 
Modernization Executive Committee and provide a cross-domain 
perspective. Domain leaders 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 
noncompliance.

Conclusion:

As seen again in Iraq, the excellence of our military forces is 
unparalleled. However, that excellence is often achieved in the face of 
enormous challenges in DOD's financial management and other business 
areas, which have serious and far-reaching implications related to the 
department's operations and critical national defense mission. Our 
recent work has shown that DOD's long-standing financial management and 
business problems have resulted in fundamental operational problems, 
such as failure to properly pay mobilized Army Guard soldiers and the 
inability to provide adequate accountability and control over supplies 
and equipment shipments in support of Operation Iraqi Freedom. Further, 
the lack of adequate transparency and appropriate accountability across 
all business areas has resulted in certain fraud, waste, and abuse and 
hinders DOD's attempts to develop world-class operations and activities 
to support its forces. As our nation continues to be challenged with 
growing budget deficits and increasing pressure to reduce spending 
levels, every dollar that DOD can save through improved economy and 
efficiency of its operations is important.

DOD's senior leaders have demonstrated a commitment to transforming the 
department and improving its business operations and have taken 
positive steps to begin this effort. We believe that implementation of 
our open recommendations and our suggested legislative initiatives 
would greatly improve the likelihood of meaningful, broad-based reform 
at DOD. The continued involvement and monitoring by congressional 
committees will also be critical to ensure that DOD's initial 
transformation actions are sustained and extended and that the 
department achieves its goal of securing the best performance and 
highest measure of accountability for the American people. We commend 
the Subcommittee for holding this hearing and we encourage you to use 
this vehicle, on at least an annual basis, as a catalyst for long 
overdue business transformation at DOD.

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

Contacts and Acknowledgments:

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-9095 or kutzg@gao.gov, Randolph Hite at (202) 512-
3439 or hiter@gao.gov, or Evelyn Logue at 202-512-3881. Other key 
contributors to this testimony include Bea Alff, Meg Best, Molly Boyle, 
Art Brouk, Cherry Clipper, Mary Ellen Chervenic, Francine Delvecchio, 
Abe Dymond, Eric Essig, Gayle Fischer, Geoff Frank, John Kelly, 
Patricia Lentini, Elizabeth Mead, Mai Nguyen, Greg Pugnetti, Cary 
Russell, John Ryan, Darby Smith, Carolyn Voltz, Marilyn Wasleski, and 
Jenniffer Wilson.

FOOTNOTES

[1] U.S. General Accounting Office, 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] U.S. General Accounting Office, DOD Financial Management: 
Integrated Approach, Accountability, Transparency, and Incentives Are 
Keys to Effective Reform, GAO-02-497T (Washington, D.C.: Mar. 6, 
2002), Information Technology: Architecture Needed to Guide 
Modernization of DOD's Financial Operations, GAO-01-525 (Washington, 
D.C.: May 17, 2001), DOD Business Systems Modernization: Improvements 
to Enterprise Architecture Development and Implementation Efforts 
Needed, GAO-03-458 (Washington, D.C.: Feb. 28, 2003), DOD Business 
Systems Modernization: Continued Investment in Key Accounting Systems 
Needs to be Justified, GAO-03-465 (Washington, D.C.: March 28, 2003), 
DOD Business Systems Modernization: Long-standing Management and 
Oversight Weaknesses Continue to Put Investments at Risk, GAO-03-553T 
(Washington, D.C.: Mar. 31, 2003), 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), and 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). 

[3] U.S. General Accounting Office, 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) and our report 
contained in the U.S. Department of the Treasury, Financial Report of 
the United States Government (Washington, D.C.: Feb. 27, 2004).

[4] 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 
government.

[5] FFMIA, Pub. L. No. 104-208, Div. A., title VIII, 110 Stat. 3009-
389--3009-393, Sept. 30, 1996, requires the 23 major departments and 
agencies covered by the Chief Financial Officers Act of 1990, Pub. L. 
No. 101-576, 104 Stat. 2838, Nov. 15, 1990 (as amended), to implement 
and maintain financial management systems that comply substantially 
with (1) federal financial management systems requirements, (2) 
applicable federal accounting standards, and (3) U.S. Standard General 
Ledger (SGL) at the transaction level. 

[6] The six case study units reviewed include the Colorado B Company, 
Virginia B Company, West Virginia C Company, Mississippi 114th Military 
Police Company, California 49th Military Police Headquarters and 
Headquarters Detachment, and the Maryland 200th Military Police 
Company. In addition, our limited review of pay experiences of soldiers 
in the Colorado Army Guard's 220th Military Police Company, who 
recently returned from Iraq, indicated that some of the same types of 
pay problems that we found in our case studies had also affected them. 

[7] Congressional Budget Office, The Long-Term Implications of Current 
Defense Plans: Detailed Update for Fiscal Year 2004 (  
HtmlResAnchor www.cbo.gov, February 2004). Figures from this report are 
in constant fiscal year 2004 dollars.

[8] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: 
January 2003). Figures from this report are in constant fiscal year 
2003 dollars.

[9] U.S. General Accounting Office, DOD High-Risk Areas: Eliminating 
Underlying Causes Will Avoid Billions of Dollars in Waste, GAO/T-NSIAD/
AIMD-97-143 (Washington, D.C.: May 1, 1997).

[10] Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 
Stat. 2842, Nov. 15, 1990 (codified, as amended in scattered sections 
of title 31, United States Code).

[11] U.S. General Accounting Office, Executive Guide: Creating Value 
Through World-class Financial Management, GAO/AIMD-00-134 (Washington, 
D.C.: April 2000) and U.S. General Accounting Office, Executive Guide: 
Maximizing the Success of Chief Information Officers: Learning From 
Leading Organizations, GAO-01-376G (Washington, D.C.: February 2001).

[12] Bob Stump National Defense Authorization Act for Fiscal Year 2003, 
Pub. L. No. 107-314, § 1004 (d), 116 Stat. 2458, 2629, Dec. 2, 2002.

[13] U.S. General Accounting Office, 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). 

[14] GAO-03-1018.

[15] GAO-03-465.

[16] GAO-02-497T.

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

[18] GAO-01-525.

[19] GAO-03-877R.

[20] U.S. General Accounting Office, Information Technology: A 
Framework for Assessing and Improving Enterprise Architecture 
Management (Version 1.1), GAO-03-584G (Washington, D.C.: April 2003).

[21] GAO-03-1018.

[22] Business systems include financial and nonfinancial systems, such 
as civilian personnel, finance, health, logistics, military personnel, 
procurement, and transportation, with the common element being the 
generation or use of financial data to support DOD's business 
operations.

[23] 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 mission. 

[24] GAO-03-465 and GAO-03-553T.

[25] GAO-03-465.

[26] U.S. General Accounting Office, Financial Management: DOD 
Improvement Plan Needs Strategic Focus, GAO-01-764 (Washington, D.C.: 
Aug. 17, 2001).

[27] U.S. General Accounting Office, DOD Financial Management: 
Important Steps Underway But Reform Will Require a Long-term 
Commitment, GAO-02-784T (Washington, D.C.: June 4, 2002).

[28] U.S. General Accounting Office, Financial Management: DOD's 
Metrics Program Provides Focus for Improving Performance, GAO-03-457 
(Washington, D.C.: Mar. 28, 2003).

[29] The Department of Defense Appropriations Act for Fiscal Year 2003, 
Pub. L. No. 107-248, § 8149, 116 Stat. 1519, 1572, Oct. 23, 2002.

[30] Department of Defense, Office of the Inspector General, Summary 
Report on Joint Review of Selected DOD Purchase Card Transactions, 
D2003-109 (Washington, D.C.: June 27, 2003).

[31] National Defense Authorization Act for Fiscal Year 2003, Pub. L. 
No. 107-107, §1008, 115 Stat. 1012, 1204, Dec. 28, 2001.

[32] DOD has one Enterprise Information Environment Mission, and six 
departmental domains including (1) acquisition/ procurement, (2) 
finance, accounting, and financial management, (3) human resource 
management, (4) logistics, (5) strategic planning and budgeting, and 6) 
installations and environment. 

[33] On September 9, 2002, GAO convened a roundtable of executive 
branch leaders and management experts to discuss the Chief Operating 
Officer concept. For more information see U.S. General Accounting 
Office, 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).