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Impede Financial and Business Management Transformation' which was 
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Before the Congressional Subcommittees: 

For Release on Delivery Expected at 2: 00 p.m. EDT Wednesday, July 7, 


Long-standing Problems Continue to Impede Financial and Business 
Management Transformation: 

Statement of Gregory D. Kutz Director, Financial Management and 

Keith A. Rhodes, Chief Technologist, Applied Research and Methodology 
Center for Engineering and Technology: 


GAO Highlights: 

Highlights of GAO-04-907T, a testimony before the Congressional 

Why GAO Did This Study: 

GAO has previously reported on the Department of Defenseís (DOD) 
financial management and business related problems and key elements 
necessary for successful reform. Although the underlying conditions 
remain fundamentally unchanged, DOD continues to be confronted with 
pervasive problems related to its systems, processes (including 
internal controls), and people (human capital). These problems impede 
DODís ability to operate its numerous business operations in an 
efficient and effective manner. The Subcommittees asked GAO to provide 
its views on (1) the impact that long-standing financial management and 
related business process weaknesses continue to have on DOD, (2) the 
underlying causes of DOD business transformation challenges, and 
(3) DODís business transformation efforts. The GAO report released 
today highlights the challenges and impediments facing the department 
as it continues to transform its financial and business management 

In addition, GAO reiterates the key elements to successful reform: 
(1) an integrated business management 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 

What GAO Found: 

DODís leadership remains committed to transforming the departmentís 
business operations. Overhauling decades-old financial management and 
business-related problems of one of the largest and most complex 
organizations in the world is a daunting challenge. DODís financial 
and business management weaknesses have resulted in billions of dollars 
in annual wasted resources in a time of increasing fiscal constraint. 
These weaknesses exist despite DOD requesting approximately $19 billion 
in fiscal year 2004 to operate, maintain, and modernize its reported 
2,274 nonintegrated business systems. At a March 2004, hearing, DODís 
Comptroller stated that the actual number of systems could be twice the 
number reported.

DODís Fiscal Year 2004 $19 Billion Business System Budget Request: 

[See PDF for image]

[End of figure]

As DOD continues to develop and implement a business enterprise 
architecture and establish control over its business systems 
investments, the underlying operational conditions remain unchanged. 
GAO found that DOD continues to spend billions of dollars on business 
systems that will not result in corporate solutions to its 
long-standing problems such as total asset visibility. GAO reviewed two 
such systems: the Defense Logistics Agencyís Business Systems 
Modernization project and the Armyís Logistics Modernization Program. 
GAO found that both projects encountered problems that, if not 
corrected, will result in two more nonintegrated systems that do not 
resolve DODís long-standing financial and business management problems.
To improve the likelihood of meaningful, broad-based reform at DOD, GAO 
has previously testified that a senior management position should be 
established to manage and oversee DODís business transformation 
efforts. Further, in the report released today, GAO proposes that 
Congress shift the control and accountability for business system 
investments from the DOD components to the recently created functional 
areas known as domains. DOD disagrees with this concept, explaining 
that its portfolio management process would provide the appropriate 
control over business system investments. In GAOís view, providing the 
funding to the domains would be one way of overcoming DODís embedded 
culture and parochial operations and help preclude spending billions on 
duplicative, nonintegrated systems.

To view the full product, including the scopeand methodology, click on 
the link above. For more information, contact Gregory Kutz, 
(202) 512-9505 ( or Keith Rhodes, (202) 512-6412 

[End of section]

Mr. Chairman and Members of the Subcommittees: 

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 these Subcommittees is critical to ultimately assuring 
public confidence in DOD as a steward that is accountable for its 
finances. DOD continues to confront pervasive decades-old financial 
management and business problems related to its systems, processes 
(including internal controls), and people (human capital). 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] These problems 
preclude the department from producing accurate, reliable, and timely 
information to make sound decisions and to accurately report on its 
trillions of dollars of assets and liabilities. Further, 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.

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) the underlying causes that have impeded 
the success of prior reform efforts, (3) the keys to successful reform, 
and (4) DOD's business systems transformation efforts. In addition, we 
will offer two suggestions for legislative consideration, which we 
believe improve the chances that DOD business systems transformation 
efforts will succeed. Our statement is based upon the report[Footnote 
2] being released at this hearing, as well as previous GAO reports and 


DOD's substantial long-standing business management systems and related 
problems adversely affect the economy, efficiency, and effectiveness of 
its operations, and have resulted in a lack of adequate accountability 
across all major business areas. These problems have left the 
department vulnerable to billions of dollars of fraud, waste, and abuse 
annually, at a time of increasing fiscal constraint. The following 
examples indicate the magnitude and severity of the problems.

* Ninety-four percent of mobilized Army National Guard soldiers from 
the six units we reviewed had pay problems. According to the 
individuals we interviewed, these problems distracted from their 
missions, imposed financial hardships on their families, and had a 
negative impact on retention. For example, the commander of one of the 
Army National Guard Special Forces case study units stated in January 
28, 2004, testimony that 25 soldiers left his unit as a direct result 
of the pay problems they experienced and that another 15 asked for 
transfers to the inactive National Guard.

* DOD sold new Joint Service Logistics Integrated Suit Technology--
chem-bio suits--on the Internet for $3 while at the same time DOD was 
buying them for over $200.[Footnote 3] Further, ineffective supply 
chain management resulted in thousands of defective suits being 
declared excess by DOD, and then improperly issued to local law 
enforcement agencies--which are likely to be first responders in case 
of a terrorist attack.[Footnote 4]

* Asset visibility and other logistical support problems hampered 
mission readiness during Operation Iraqi Freedom, including 
cannibalization of vehicles for parts and duplication of 
requisitions.[Footnote 5]

Further evidence of DOD's problems is the long-standing inability of 
any military service or major defense component to pass the test of an 
independent financial audit because of pervasive weaknesses in 
financial management systems, operations, and controls.

Over the years, the department has initiated several broad-based reform 
efforts intended to fundamentally reform its business operations. 
However, these efforts have not resulted in the fundamental reform 
necessary to resolve the department's long-standing management 
challenges because the department has not addressed the four underlying 
causes that have impeded meaningful reform: 

* lack of sustained leadership and management accountability;

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

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

* inadequate incentives and accountability mechanisms for business 
transformation efforts.

These four issues, to a large degree, have impeded DOD's efforts to 
modernize its business systems--a critical factor in its transformation 
efforts. DOD's stovepiped, duplicative, nonintegrated systems 
environment contributes to its operational problems and costs the 
taxpayers billions of dollars each year. For fiscal year 2004, DOD 
requested approximately $19 billion to operate, maintain, and modernize 
its reported 2,274 business systems. The existing systems environment 
evolved over time as DOD components--each receiving their own funding-
-developed narrowly focused parochial solutions to their business 
problems. Unfortunately, however, these system solutions have not been 
implemented on time, within budget, and delivered the promised 
capability. The two systems--the Defense Logistics Agency's Business 
Systems Modernization (BSM) effort and the Army's Logistics 
Modernization Program (LMP)--discussed in the report released today are 
no exception.

Successful reform of DOD's fundamentally flawed financial and business 
management operations must simultaneously focus on its systems, 
processes, and people. While DOD has made some encouraging progress in 
addressing specific challenges, it is still in the very early stages of 
a departmentwide reform that will take many years to accomplish. 
Secretary Rumsfeld has made business transformation a priority. For 
example, through its Business Management Modernization Program (BMMP), 
DOD is continuing its efforts to develop and implement a business 
enterprise architecture (BEA) and establish effective management 
oversight and control over its business systems modernization 
investments. However, after about 3 years of effort and over $203 
million in reported obligations, we have not seen significant change in 
the content of DOD's architecture or in its approach to investing 
billions of dollars annually in existing and new systems. We have made 
numerous recommendations aimed at improving DOD's plans for developing 
the next version of the architecture and implementing controls for 
selecting and managing business systems investments.[Footnote 6] To 
date, DOD has not addressed 22 of our 24 recommendations.

The seriousness of DOD's business management weaknesses underscores the 
importance of no longer condoning "status quo" business operations at 
DOD. To improve the likelihood that the department's current business 
transformation efforts will be successful, we have previously 
suggested[Footnote 7] that a chief management official[Footnote 8] 
position be created. The individual would be responsible for overseeing 
key areas such as strategic planning, performance and financial 
management, and business systems modernization, while also facilitating 
the overall business transformation effort within the department.

Further, in the report released today,[Footnote 9] we also suggest that 
to improve management oversight, accountability, and control of the 
department's business system funding, Congress may wish to consider 
providing the funds to operate, maintain, and modernize DOD's business 
systems to the functional areas, known as domains, rather than the 
military services and the defense agencies. Currently, each military 
service and defense agency receives its own funding and is largely 
autonomous in deciding how to spend these funds, thereby hindering the 
development of broad-based, integrated corporate system solutions to 
common DOD-wide problems. Transforming DOD's business operations and 
making them more efficient would free up resources that could be used 
to support the department's core mission, enhance readiness, and 
improve the quality of life for our troops and their families.


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. For fiscal year 2004, the 
department was appropriated more than $425 billion, which included 
approximately $65 billion for contingency operations. 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 
operation. To execute these military operations, the department 
performs an assortment of interrelated and interdependent business 
processes, including logistics management, procurement, healthcare 
management, and financial management.

Transformation of DOD's business systems and operations is critical to 
the department providing Congress and DOD management with accurate and 
timely information for use in decision making. One of the key elements 
we have reported[Footnote 10] as necessary to successfully execute the 
transformation is establishing and implementing an enterprise 
architecture. In this regard, the department has undertaken a daunting 
challenge to modernize its existing business systems environment 
through the development and implementation of a business enterprise 
architecture (BEA)--a modernization blueprint. This effort is an 
essential part of the Secretary of Defense's broad initiative to 
"transform the way the department works and what it works on." 
Secretary Rumsfeld has estimated that successful improvements to DOD's 
business operations could save the department 5 percent of its budget a 
year, which equates to over $20 billion a year in savings.

Pervasive Financial and Business Management Problems Affect DOD's 
Efficiency and Effectiveness: 

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 
testified in March 2004 and as discussed in our latest financial audit 
report,[Footnote 11] 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 12] 
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 13] 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.

Pervasive weaknesses in DOD's financial management and related business 
processes and systems 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.

* Of the 481 mobilized Army National Guard soldiers from six GAO case 
study Special Forces and Military Police units,[Footnote 14] 450 had at 
least one pay problem associated with their mobilization. According to 
the individuals we interviewed, 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.[Footnote 15] More 
specifically, in January 28, 2004 testimony, the commander of one unit 
stated that 25 soldiers left the unit as a direct result of the pay 
problems they experienced and that another 15 asked for transfers to 
the inactive National Guard. He also stated that because it would take 
an estimated 2 years and $250,000 to train each replacement, these 
losses have had a significant negative impact on the unit's mission 
capability--one of only six such units in the nation.

* 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.[Footnote 16]

* 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.[Footnote 17]

* Inadequate asset visibility and accountability resulted in DOD 
selling new Joint Service Lightweight Integrated Suit Technology--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.[Footnote 18] DOD has 
acknowledged that these garments should have been restricted to DOD use 
only and therefore should not have been available to the public.

* 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. 
We also found numerous instances of abusive or potentially criminal 
activity[Footnote 19] related to the federal tax system during our 
audit and investigation of 47 DOD contractor case studies. The 34 case 
studies involving businesses with employees had primarily unpaid 
payroll taxes, some dating to the early 1990s and some for as many as 
62 tax periods.[Footnote 20] The other 13 case studies involved 
individuals who had unpaid income taxes dating as far back as the 
1980s. Several of these contractors provided parts or services 
supporting weapons and other sensitive military programs.[Footnote 21]

* 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 were not properly authorized and that 73 percent 
were not properly justified. During fiscal years 2001 and 2002, DOD 
spent almost $124 million on tickets that included at least one leg in 
premium class--usually business class. Because each premium class 
ticket costs 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.[Footnote 22]

* Control breakdowns resulted in DOD paying for airline tickets that 
were not used and not processed for refund--amounting to about 58,000 
tickets totaling more $21 million for fiscal years 2001 and 2002. DOD 
was not aware of this problem before our audit and did not maintain any 
data on unused tickets. Based on limited data provided by the airlines, 
it is possible that the unused value of the fully and partially unused 
tickets DOD purchased from fiscal years 1997 through 2003 with DOD's 
centrally billed account could be at least $115 million.[Footnote 23]

* We found that DOD sometimes paid twice for the same airline ticket--
first to the Bank of America for the monthly credit and bill, and 
second to the traveler, who was reimbursed for the same ticket. Based 
on our mining of limited data, the potential magnitude of the improper 
payments was 27,000 transactions for over $8 million. For example, DOD 
paid a Navy GS-15 civilian employee $10,000 for 13 airline tickets he 
had not purchased.[Footnote 24]

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 its 
operations, and to provide for accountability to Congress and American 

Underlying Causes of Financial and Related Business Process 
Transformation Challenges: 

Since May 1997,[Footnote 25] we have highlighted in various reports and 
testimonies 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 previously discussed. Over the 
years, the department has initiated several broad-based reform efforts 
intended to fundamentally reform its business operations and improve 
the reliability of information used in the decision-making process. 
Unfortunately, these initiatives have generally proven to be less 
successful than anticipated because DOD has not addressed the following 
four underlying causes: 

* 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;

* 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, which I will now 
highlight, will likely result in the failure of current DOD 
transformation efforts and continue to hinder the department's ability 
to produce accurate, reliable, and timely information to make sound 
decisions and to accurately report on its billions of dollars of 
assets, such as inventory.

Lack of Sustained Leadership and Adequate Accountability: 

Historically, DOD has not routinely assigned accountability for 
financial management 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 
26] 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 remaining 80 percent 
comes from DOD's other business areas such as acquisition and 
personnel, which are not under the control and authority of the DOD 

Further, 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 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 DOD leadership has demonstrated its commitment to 
reforming the department's business operations, the magnitude and 
nature of day-to-day demands placed on these leaders, given the current 
world events associated with fighting the war on terrorism, clearly 
affect the level of oversight, commitment, and involvement they can 
devote to the transformation efforts. Given the importance of DOD's 
business transformation efforts, it is imperative that it receives 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 27] 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 and that many of 
these practices were developed piecemeal and evolved to accommodate 
different organizations, each with its own policies and procedures. 
Recent audits reveal that DOD has made only small inroads in addressing 
these challenges. For example,

as discussed in our May 2004 report,[Footnote 28] DOD does not have the 
processes and controls in place to provide reasonable assurance that it 
is in compliance with the fiscal year 2003 defense authorization 
act,[Footnote 29] which requires the DOD Comptroller to review all 
system improvements with obligations exceeding $1 million. As a result, 
DOD was not able to satisfy our request for information on all 
obligations in excess of $1 million for system modernizations since 
passage of the act. Based upon a comparison of limited information 
provided by the military services and defense agencies for fiscal years 
2003[Footnote 30] and 2004, as of December 2003, we identified a total 
of $863 million in obligations that exceeded $1 million for system 
improvements that were not submitted to the DOD Comptroller for 
required review.

Additionally, as discussed in the report[Footnote 31] released today, 
DOD continued to use a stovepiped approach to develop and fund its 
business system investments. As shown in table 1, DOD requested 
approximately $18.8 billion for fiscal year 2004 to operate, maintain, 
and modernize its reported 2,274 nonintegrated, duplicative, stovepiped 
business systems. The table also shows how business system funding is 
spread across various DOD components.

Table 1: DOD Fiscal Year 2004 Information Technology Budget Request for 
Business Systems by DOD Component: 

Dollars in millions.

Total: $3,652.

Total: $3,778.

Air Force; 
Total: $3,737.

Total: $3,938.

Total: $980.

Total: $774.

Total: $502.

Other DOD components[E]; Total: $1,440.

Total: $18,801.

Source: GAO analysis based on DOD's fiscal year 2004 IT budget request.

[A] The Defense Information Systems Agency provides DOD and other 
organizations with a wide range of information services, such as data 
processing, telecommunications services, and database management.

[B] TRICARE is the health care system for DOD's active duty personnel, 
their dependents, and retirees.

[C] DLA is DOD's logistics manager for all consumable and some repair 
items; its primary business function is providing supply support to 
sustain military operations and readiness.

[D] Defense Finance and Accounting Service is the centralized 
accounting agency for DOD.

[E] Other DOD components include entities such as the Office of the 
Secretary of Defense and the Defense Contract Management Agency.

[End of table]

The existing systems environment evolved over time as DOD components--
each receives its own system funding and follows decentralized 
acquisition and investment practices--developed narrowly focused 
parochial solutions to their business problems. DOD's ability to 
address its current "business-as-usual" approach to business system 
investments is further hampered by its lack of: 

* a complete inventory of business systems--a condition we first 
highlighted in 1998. In fact, the DOD Comptroller testified in March 
2004[Footnote 32] that the size of DOD's actual systems inventory could 
be twice the size currently reported;

* a standard definition of what constitutes a business system;

* a well-defined BEA; and: 

* an effective approach for the control and accountability over 
business system modernization investments.

Until DOD develops and implements an effective strategy for overcoming 
resistance, parochialism, and stovepiped operations, its 
transformation efforts will not be successful. Further, there can be 
little confidence that it will not continue to spend billions of 
dollars on duplicative, nonintegrated systems that do not optimize 
mission performance and support the warfighter.

Lack of Results-Oriented Goals and Performance Measures: 

At a programmatic level, the lack of clear, linked goals and 
performance measures handicapped DOD's past reform efforts. As a 
result, DOD managers lacked straightforward road maps showing how their 
work contributed to attaining the department's strategic goals, and 
they risked operating autonomously rather than collectively. As of 
March 2004, DOD formulated departmentwide performance goals and 
measures and continues to refine and align them with the outcomes 
described in its strategic plan--the September 2001 Quadrennial Defense 
Review (QDR). The QDR outlined a new risk management framework, 
consisting of four dimensions of risk--force management, operational, 
future challenges, and institutional--to use in considering trade-offs 
among defense objectives and resource constraints. According to DOD's 
Fiscal Year 2003 Annual Report to the President and the Congress, these 
risk areas are to form the basis for DOD's annual performance goals. 
They will be used to track performance results and will be linked to 
resources. As of March 2004, DOD was still in the process of 
implementing this approach on a departmentwide basis.

DOD currently has plans to institutionalize performance management by 
aligning management activities with the President's Management Agenda. 
As part of this effort, DOD linked its fiscal year 2004 budget 
resources with metrics for broad program areas, e.g., air combat, 
airlift, and basic research in the Office of Management and Budget's 
(OMB) Program Assessment Rating Tool.[Footnote 33] We have not reviewed 
DOD's efforts to link resources to metrics; however, some of our recent 
work notes the lack of clearly defined performance goals and measures 
in the management of such areas as defense inventory and military 
pay.[Footnote 34] Further, without modern integrated systems and 
streamlined business processes, the accuracy and reliability of DOD's 
performance data will be questionable.

One program that has yet to establish measurable, results-oriented 
goals is the BMMP.[Footnote 35] The BMMP is the department's business 
transformation initiative encompassing defense policies, processes, 
people, and systems that guide, perform, or support all aspects of 
business management, including development and implementation of the 
BEA. A key element of any major program is its ability to establish 
clearly defined goals and performance measures to monitor and report 
its progress to management. Since DOD has yet to develop performance 
measures for the BMMP, it is difficult to evaluate and track, on an 
ongoing basis, specific program progress, outcomes, and results, such 
as explicitly defining performance measures to evaluate the 
architecture's quality, content, and utility of subsequent major 
updates. Given that DOD has reported obligations of over $203 million 
since architecture development efforts began 3 years ago, this is a 
serious performance management weakness.

DOD recognizes that it needs to develop detailed plans and establish 
performance metrics to measure and track program progress to determine 
what it planned to accomplish by a certain point in time, what it 
actually accomplished at that point in time, and what has been spent 
thus far. In its March 15, 2004, progress report on the implementation 
of the BEA, DOD reported that it plans to establish an initial approved 
program metrics baseline to evaluate the cost, schedule, and 
performance of the program and that, beginning with the fourth quarter 
of fiscal year 2004, it plans to begin formal tracking and reporting of 
specific program goals, objectives, and measures. Without explicitly 
defined program baselines, detailed plans, and performance measures, it 
is difficult to validate or justify the $122 million requested for 
fiscal year 2005 and the $494 million estimated to be needed for fiscal 
years 2006 through 2009.

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.

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. For example, our March 2003 report[Footnote 36] 
noted that DOD had not effectively managed and overseen its planned 
investment of over $1 billion in four Defense Finance and Accounting 
Service (DFAS) system modernization efforts. One project's estimated 
cost had increased by as much as $274 million, while the schedule 
slipped by almost 4 years. For each of these projects, DOD oversight 
entities--DFAS, the DOD Comptroller, and the DOD CIO--could not provide 
documentation that indicated they had questioned the impact of the cost 
increases and schedule delays, and allowed the projects to proceed in 
the absence of the requisite analytical justification. Such 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. Two of the four 
projects--the Defense Procurement Payment System and the Defense 
Standard Disbursing System--were terminated in December 2002 and 
December 2003, respectively, after an investment of approximately $179 
million that did not improve the department's business operations.

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 invest billions of dollars in business systems 
modernization, while at the same time it lacks the effective management 
and oversight needed to achieve 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.

Keys to Successful Reform: 

Successful reform of DOD's fundamentally flawed financial and business 
management operations must simultaneously focus on its systems, 
processes, and people. While DOD has made some encouraging progress in 
addressing specific challenges, it is still in the very early stages of 
a departmentwide reform that will take many years to accomplish. At 
this time, it is not possible to predict when--or even whether--DOD's 
reform effort will be successful.

Our experience has shown there are several key elements that 
collectively would enable the department to effectively address the 
underlying causes of its inability to resolve its long-standing 
financial management problems. These elements, which we believe are key 
to any successful approach to transforming the department's business 
operations, include: 

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

* providing for sustained 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 

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

* providing appropriate incentives or consequences for action or 

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

* ensuring effective oversight and monitoring.

These elements, which should not be viewed as independent actions but 
rather as a set of interrelated and interdependent actions, are 
reflected in the recommendations we have made to DOD and are consistent 
with those actions discussed in the department's April 2001 financial 
management transformation report.[Footnote 37] 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. Further, as will be discussed in more 
detail later, we have not yet seen a comprehensive, cohesive strategy 
that details how some of the ongoing efforts are being integrated. For 
example, we have not seen how the department plans to integrate its 
objective of obtaining an unqualified audit opinion in fiscal year 2007 
with the BMMP. It appears as if these two key efforts are being 
conducted in a stovepiped manner.

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--
that DOD currently has underway and, if properly developed and 
implemented, will result in significant improvements in DOD's business 
systems and operations.

Effectively managing and overseeing the department's $19 billion 
investment in its business systems is key to the successful 
transformation of DOD's business operations. The transformation also 
depends on the ability of the department to develop and implement 
business systems that provide users and department management with 
accurate and timely information on the results of operations and that 
help resolve the numerous long-standing weaknesses. As DOD moves 
forward with BMMP, it needs to ensure that the department's business 
systems modernization projects--such as BSM and LMP, discussed in the 
report released today--are part of a corporate solution to DOD long-
standing business problems. To assist the department with it ongoing 
efforts, 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,[Footnote 38] is vital to the department's efforts to 
transform its business operations.[Footnote 39] 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 
systems investments are consistent with the architecture and provide 
world class mission support to the fighting force. 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.

However, we recently reported[Footnote 40] that since our last 
review,[Footnote 41] and after about 3 years of effort and over $203 
million in reported obligations, we have not seen significant change in 
the content of DOD's architecture or in DOD's approach to investing 
billions of dollars annually in existing and new systems. Few actions 
have been taken to address the recommendations we made in our previous 
reports,[Footnote 42] which were aimed at improving DOD's plans for 
developing the next version of the architecture and implementing the 
institutional means for selecting and controlling both planned and 
ongoing business systems investments. To date, DOD has not yet 
addressed 22 of our 24 recommendations.

Further, DOD has not yet developed either near-term or long-term plans 
for developing the architecture that explicitly identify and establish 
a baseline for the actions to be taken, milestones to be achieved, cost 
estimates to be met, and targeted outcomes to be achieved. DOD has 
adopted an incremental approach to developing the architecture, 
including the transition plan, and plans to refine and extend the 
architecture in three increments, the first of which includes in part 
the department's efforts to obtain an unqualified audit opinion of 
DOD's consolidated fiscal year 2007 financial statements.

However, it is unclear what the increments individually or collectively 
mean, and what they will provide or allow DOD to achieve in the near 
and long term, because, as previously discussed, DOD has yet to develop 
detailed performance measures. Although the three increments were 
identified in November 2003, program officials do not expect to have a 
plan for increment one until the next version of the transition plan is 
completed in August 2004. According to program officials, the goals and 
scope for the second and third increments were only recently approved 
and, therefore, detailed plans of action and milestones do not yet 

Currently, DOD has three initiatives under way to support increment 
one. First, the program office is developing a plan of action for 
increment one and intends to complete the plan by August 2004. Second, 
the accounting and finance domain is conducting workshops to develop 
needed business rules and requirements for extending and evolving 
version 2.0 of the architecture. Last, DOD components are developing 
individual plans detailing their respective efforts for supporting 
increment one. However, there is no evidence that the program office is 
coordinating with the components and that the components are 
coordinating amongst themselves. Because there are not yet detailed 
plans guiding the program's activities, it is unclear whether and how 
these activities support each other and whether they support the 
department's goal of achieving an unqualified audit opinion in 2007.

As DOD moves forward with the BEA, it will be essential that the 
department have the management structure and processes in place to (1) 
improve the control and accountability over its billions of dollars of 
business systems investments; (2) develop corporate solutions to common 
business problems; and (3) implement system projects within budget, on 
time, and deliver the promised capability. The failure of the 
department to have the appropriate management structure and processes 
could result in billions of dollars continuing to be at risk of being 
spent on more systems that are duplicative, are not interoperable, cost 
more to maintain than necessary, and do not optimize mission 
performance and accountability.

Control and Accountability Over Business System Investments: 

As previously discussed, DOD continues to lack adequate control and 
accountability over its billions of dollars of business systems 
investments. Each DOD component continues to make its own investment 
decisions, which has led to the proliferation of systems. As shown in 
table 2, the department has reported that it has at least 2,274 
business systems. For example, the department reportedly has 665 
systems to support human resource management, 565 systems to support 
logistical functions,[Footnote 43] 542 systems to perform finance and 
accounting functions, and 210 systems to support strategic planning and 
budget formulation.

Table 2: 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.

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]

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 
proliferation of systems has resulted because DOD components are 
largely autonomous and each receives its own business system funding.

DOD has recognized the need to improve its control and accountability 
of its business system investments and has various initiatives underway 
and planned. For example, in response to our recommendations,[Footnote 
44] DOD issued a policy in March 2004 that assigns the domains the 
responsibility for IT portfolio management. However, the procedures to 
be followed to implement the policy are currently being developed and 
no time frames for completion have been provided. In addition, specific 
roles and responsibilities of the domains have not yet been formalized, 
standard criteria for performing the system reviews have not been 
developed, and explicit authority for fulfilling roles and 
responsibilities has not been assigned. Although DOD recognizes the 
need to clarify the roles and responsibilities associated with managing 
the domains' portfolios of business systems and ensuring compliance 
with the architecture, it has not yet established time frames for 
completing these activities.

While DOD is continuing to work toward establishing the structure and 
processes to manage its business systems investments, it has not yet 
conducted a comprehensive system review of its ongoing IT investments 
to ensure that they are consistent with its BEA efforts. Additionally, 
execution of a comprehensive review of all modernization efforts by DOD 
before billions of dollars have been invested will reduce the risk of 
continuing the department's track record of business systems 
modernization efforts that cost more than anticipated, take longer than 
expected, and fail to deliver intended capabilities.

Corporate Solutions to Common Problems: 

The department's business transformation also depends on its ability to 
develop and implement business systems that provide corporate solutions 
to DOD's numerous long-standing problems. This approach should help 
preclude the continued proliferation of duplicative, stovepiped systems 
and reduce spending on multiple systems that are supposed to perform 
the same function. However, as discussed in our report[Footnote 45] 
released today, DOD is still developing systems that are not designed 
to solve corporatewide problems. BSM and LMP were initiated in November 
1999 and February 1998, respectively, prior to DOD undertaking the BEA 
and establishing the domains. As such, they were not directed towards a 
corporate solution to the department's long-standing weaknesses in the 
inventory and logistics management areas, such as total asset 
visibility. Rather, both projects are more focused on DLA's and the 
Army's respective inventory and logistics management operations. Today, 
I would like to focus on one of those issues--total asset visibility, 
because of its significant impact on DOD's operational effectiveness.

In October 2002, a DLA official testified[Footnote 46] that BSM would 
provide improved control and accountability over the Joint Services 
Lightweight Integrated Suit Technology (JSLIST), which is a 
lightweight, two-piece garment--coat and trousers--designed to provide 
maximum protection against chemical and biological contaminants. Total 
asset visibility is critical for sensitive items such as the JSLIST. 
For example, tracking the specific location of each suit by lot number 
is necessary if for any reason they have to be recalled, as was the 
case with the JSLIST predecessor the Battle Dress Overgarment (BDO).

Over 700,000 of the BDOs were found to be defective and were recalled. 
Since DOD's systems did not provide the capability to identify the 
exact location of each suit, a series of data calls were conducted, 
which proved to be ineffective. We reported in September 2001[Footnote 
47] that DOD was unable to locate approximately 250,000 of the 
defective suits and therefore was uncertain if the suits were still in 
the possession of the military forces, or whether they had been 
destroyed or sold. Subsequently, we found that DOD had sold many of 
these defective suits to the public as excess, including 379 that we 
purchased in an undercover operation.[Footnote 48] In addition, DOD may 
have issued over 4,700 of the defective BDO suits to local law 
enforcement agencies. This is particularly significant because local 
law enforcement agencies are most likely to be the first responders to 
a terrorist attack, yet DOD failed to inform these agencies that using 
these suits could result in death or serious injury.

At the October 2002 hearing, the DLA official stated that JSLIST would 
be included in BSM at the earliest practicable date, which was 
estimated to be December 2003. BSM, however, is not designed to provide 
the corporate total asset visibility necessary to locate and track the 
suits throughout DOD's supply chain. While the suits are expected to be 
included in a future deployment of BSM, at the time of our review 
program officials had not yet specified a date when they will be 
included. Even when the suits are included, BSM is designed to provide 
visibility over the suits only within the DLA environment--something 
DLA has stated already exists within its current system environment.

As we have previously reported,[Footnote 49] the lack of integrated 
systems hinders DOD's ability to know how many JSLIST it has on hand 
and where they are located once they leave the DLA warehouse. For 
example, we found that military units that receive JSLIST from DLA 
warehouses maintained inventory data in nonstandard, stovepiped systems 
that did not share data with DLA or other DOD systems. The methods used 
to control and maintain visibility over JSLIST at the units we visited 
ranged from stand-alone automated systems, to spreadsheet applications, 
to pen and paper. One military unit we visited did not have any 
inventory system for tracking JSLIST. BSM does not address asset 
visibility outside of DLA's supply chain for the JSLIST, and thus 
cannot provide DOD with the capability to readily locate JSLIST for any 
reason, including any potential need for a recall of defective suits.

Similarly, the report released today[Footnote 50] also states that LMP 
will not provide the Army with total asset visibility until a suite of 
other systems has been developed and implemented. Specifically, Army 
officials have stated that LMP will require integration with other Army 
systems that are under development in order to achieve total asset 
visibility within the Army. These additional systems are the Product 
Lifecycle Management Plus (PLM+) and Global Combat Support System--Army 
(GCSS-A). According to the Army, PLM+ is to integrate LMP and GCSS-A to 
create end-to-end solution for Army logistics. However, time frames and 
cost estimates have not been developed for these two additional system 

Further, to help provide for departmentwide total asset visibility, DLA 
is undertaking the implementation of the Integrated Data Environment 
(IDE) program. According to DLA, this initiative is intended to provide 
the capability for routing data from multiple systems within DLA and 
DOD into one system. According to DLA, IDE is expected to reach full 
operational capability in August 2007, with a current estimated cost of 
approximately $30 million. However, successfully meeting this 
completion date depends on other departmental efforts being completed 
on time, such as PLM+, for which a completion date had not been 

Project Management and Oversight: 

While the success of BMMP and improved control and accountability of 
business system investments are critical aspects of the department's 
transformation efforts, equally important is the ability of DOD to 
implement chosen systems solutions on time, within budget, and with the 
promised capability. The department has not demonstrated the ability to 
achieve these goals. The previously discussed DFAS system projects--
DPPS and DSDS--are a clear case in point. After several years of effort 
and an investment of $179 million, these two projects were terminated 
without any improvement in departmental operations.

As discussed in the report[Footnote 51] released today, BSM and LMP 
have also experienced cost increases, schedule slippages, and did not 
deliver planned system capabilities in their first release. Our 
analysis indicated that many of the operational problems experienced by 
BSM and LMP can be attributed to DOD's inability to effectively 
implement the disciplined processes necessary to reduce the risks 
associated with these projects to acceptable levels. Disciplined 
processes have been shown to reduce the risks associated with software 
development and acquisition efforts to acceptable levels and are 
fundamental to successful systems acquisition. Said another way, a 
disciplined software development and acquisition process can maximize 
the likelihood of achieving the intended results (performance) within 
established resources (costs) on schedule.

Specifically, in the case of these two projects, they had significant 
deficiencies in defining requirements and testing--two areas that form 
the foundation for a project's success or failure. In fact, DLA and 
Army program officials acknowledged that requirements and testing 
defects were factors contributing to the operational problems and 
stated that they are working to develop more effective processes. To 
their credit, DLA and the Army have decided that future deployments of 
BSM and LMP will not go forward until they have reasonable assurance 
that the deployed systems will operate as expected for a given 
deployment. Lacking disciplined processes exposes projects to the 
unnecessary risk that costly rework will be required, which in turn 
will continue to adversely affect a projects' cost, schedule, and 
performance goals. Our analysis of selected BSM and LMP key 
requirements[Footnote 52] and testing processes found that (1) the 
functionality to be delivered was not adequately described or stated to 
allow for quantitative evaluation; (2) the traceability among the 
various process documents (e.g., operational requirements documents, 
functional or process scenarios, and test cases) was not maintained; 
and (3) system testing was ineffective. Historically, projects that 
experience the types of requirements and testing process weaknesses 
found in BSM and LMP have a high probability of not meeting schedule, 
cost, and performance objectives.

The problems we identified in the areas of requirements management and 
testing contributed to BSM and LMP experiencing difficulties when they 
became operational.

* Army and DFAS officials reported that LMP's operational difficulties 
at Communications and Electronics Command and Tobyhanna Army Depot have 
resulted in inaccurate financial management information. More 
specifically, the depot is not (1) producing accurate workload planning 
information; (2) generating accurate customer bills; and (3) capturing 
all repair costs, which is impeding the Army's ability to calculate 
accurate future repair prices. These problems can also hinder the 
Army's ability to accurately report the results of its depot operations 
and limit customers' ability to develop accurate budget estimates.

* BSM experienced significant data conversion problems associated with 
purchase requisitions and purchase orders that were created in the 
Standard Automated Materiel Management System (SAMMS). Moving the data 
from SAMMS to BSM proved difficult because BSM required more detailed 
information, which was not identified during the requirements phase. 
This additional information needed to be manually entered into BSM, 
resulting in numerous errors that caused vendors not to be recognized 
and shipments from the depot to be rejected. As a result of these 
problems, additional tables, such as vendor master files, were created 
within BSM to process orders for the converted purchase requisitions 
and purchase orders.

One of the long-standing problems within DOD has been the lack of 
integrated systems. This is evident in the many duplicative, stovepiped 
systems among the 2,274 that DOD reported as its systems environment. 
Lacking integrated systems, DOD will have a difficult time obtaining 
accurate and reliable information on the results of its business 
operations and will continue to rely on either manual reentry of data 
into multiple systems, convoluted system interfaces, or both. These 
system interfaces provide data that are critical to day-to-day 
operations, such as obligations, disbursements, purchase orders, 
requisitions, and other procurement activities. For BSM and LMP, we 
found that the system interfaces were not fully tested in an end-to-end 
manner, and therefore DLA and Army did not have reasonable assurance 
that BSM and LMP would be capable of providing the intended 

We previously reported[Footnote 53] that Sears and Wal-Mart, recognized 
as leading-edge inventory management companies, had automated systems 
that electronically received and exchanged standard data throughout the 
entire inventory management process, thereby reducing the need for 
manual data entry. As a result, information moves through the data 
systems with automated ordering of inventory from suppliers; receiving 
and shipping at distribution centers; and receiving, selling, and 
reordering at retail stores. Unlike DOD, which has a proliferation of 
nonintegrated systems using nonstandard data, Sears and Wal-Mart do not 
allow individual systems development and require all components and 
subsidiaries to operate within a standard systems framework that 
results in an integrated system.

For the first deployment of BSM, DLA has had to develop interfaces that 
permit BSM to communicate with more than 23 systems, including 3 DFAS, 
6 DOD-wide, and 14 DLA systems. The Army has had to develop 215 
interfaces that permit LMP to communicate with more than 70 systems, 
including 13 DFAS, 6 DLA, 2 Navy, 5 Air Force, and over 24 Army 
systems. When BSM and LMP became operational, it became evident that 
the system interfaces were not working as intended. Such problems have 
led BSM, LMP, and organizations with which they interface--such as 
DFAS--to perform costly manual reentry of transactions, which can cause 
additional data integrity problems. While these numerous interfaces are 
necessary because of the existing stovepiped, nonintegrated systems 
environment, they should have been fully developed and tested prior to 
BSM and LMP being deployed. In moving forward with the future 
deployments of BSM and LMP, it is critical that program officials 
ensure that the numerous system interfaces are operating as intended.

In commenting on the report[Footnote 54] released today, the department 
acknowledged that the initial implementation of BSM and LMP experienced 
problems that could be attributed to the lack of adequate requirements 
determination and system testing. To address these inadequacies, the 
department noted that requirements analysis had been expanded to 
include greater specificity and that the successful completion of 
comprehensive testing would be required prior to further implementation 
of either system.

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's success but also 
to incorporate needed key elements to successful reform. These 
suggestions would include the (1) creation of a chief management 
official and (2) centralization of the funding business systems 
investments with the domain leaders responsible for the department's 
various business areas, such as logistics and human resource 
management. We provided similar views in our testimonies on March 23, 
2004,[Footnote 55] before the Subcommittee on Readiness and Management 
Support, Senate Committee on Armed Services, and on March 31, 2004,
[Footnote 56] before the Subcommittee on Terrorism, Unconventional 
Threats, and Capabilities, House Committee on Armed Services.

Chief Management Official: 

I will now discuss our first matter for consideration. Previous failed 
attempts to improve DOD's business operations illustrate the need for 
sustained involvement of DOD leadership in helping to assure that DOD's 
financial and overall business process transformation efforts remain a 
priority. While the Secretary and other key DOD leaders have 
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 

However, the tenure of the department's top political appointees has 
generally been short in duration and as a result, it is sometimes 
difficult to maintain the focus and momentum that are needed to resolve 
the management challenges facing DOD. For example, the former DOD 
Comptroller, who was very supportive of the current transformation 
effort, and one of its principal leaders, served as the DOD Comptroller 
for slightly over 3 years. Further, the current Principal Deputy and 
the Deputy Under Secretary of Defense for Management Reform, within the 
office of the DOD Comptroller, will soon be leaving the department. He 
also was in that position for slightly over 3 years. Additionally, 
leadership voids have existed in other key positions such as the 
program manager for BMMP. From May 2003 to February 2004, there was no 
program manager to identify, direct, and execute program 
activities.[Footnote 57] The resolution of the array of interrelated 
business system management challenges that DOD faces is likely to span 
several administrations and require sustained leadership 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[Footnote 58] who would serve as the Principal Under Secretary 
of Defense for Management. 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. 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. 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.

Functional Domain Control and Accountability Over Business System 

We have made numerous recommendations to DOD intended to improve the 
management oversight and control of its business systems investments. 
However, 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 spends billions of dollars annually on business 
systems and related infrastructure, it is critical that actions be 
taken to gain more effective control over such business systems 

The second suggestion we have for legislative action to address this 
issue, as contained is the report[Footnote 59] released at today's 
hearing and 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., accounting, acquisition, logistics, and personnel) 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 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 proposed 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 

In commenting on our report, DOD stated that it did not agree with this 
funding concept. The department stated that the portfolio management 
process being established--to include investment review boards--would 
provide the appropriate control and accountability over business system 
investments. DOD also stated that beginning with the fiscal year 2006 
budget review process, the domains will be actively involved in 
business system investment decisions. DOD stated that the military 
services implement their own statutory authorities for acquisition and 
IT systems development in consultation with DOD. While the 
establishment of the investment review boards is consistent with our 
previous recommendations, we continue to believe that appropriating 
funds for DOD business systems to the domains, rather than the various 
DOD entities, will significantly improve accountability over business 
system investments. DOD's comments indicate that the domains will be 
more accountable for making business system investment decisions, but 
unless they control the funding, they will not have the means to effect 
real change. Continuing to provide business system funding to the 
military services and defense agencies is an example of the 
department's embedded culture and parochial operations. As a result of 
DOD's intent to maintain the status quo, there can be little confidence 
that it will not continue to spend billions of dollars on duplicative, 
nonintegrated, stovepiped, and overly costly systems that do not 
optimize mission performance and accountability and, therefore, do not 
support the department's transformation goals.


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 
appropriate accountability across all business areas has resulted in 
fraud, waste, and abuse and hinders DOD's attempts to develop world-
class operations and activities to support its forces. Additionally, 
DOD cannot provide Congress reasonable assurance that the billions of 
dollars spent annually on business systems modernizations are not being 
wasted on projects that will perpetuate the current costly, 
nonintegrated, duplicative systems environment. If DOD is unable to 
address the underlying causes that have resulted in the failure of 
previous broad-based reform efforts, improvements will remain marginal, 
confined to narrowly defined incremental improvements.

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 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 Subcommittees 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) 512-9505 or [Hyperlink,], or Keith A. 
Rhodes at (202) 512-6412 or [Hyperlink,]. The following 
individuals contributed to the various reports and testimonies that 
were the basis for the testimony: Beatrice Alff, Molly Boyle, Art 
Brouk, Cherry Clipper, Mary Ellen Chervenic, Francine Delvecchio, 
Stephen Donahue, Francis Dymond, Eric Essig, Gayle Fischer, Geoff 
Frank, John Kelly, Randolph Hite, Cynthia Jackson, Neelaxi Lakhmani, 
Evelyn Logue, John Martin, Elizabeth Mead, Mai Nguyen, Michael Peacock, 
David Plocher, Gregory Pugnetti, Cary Russell, John Ryan, Katherine 
Schirano, Darby Smith, Carolyn Voltz, Marilyn Wasleski, and Jenniffer 

[End of section]

GAO Related Products: 

U.S. General Accounting Office, DOD Business Systems Modernization: 
Important Progress Made to Develop Business Enterprise Architecture, 
but Much Work Remains, 
(Washington, D.C.: Sept. 19, 2003).

U.S. General Accounting Office, Business Systems Modernization: Summary 
of GAO's Assessment of the Department of Defense's Initial Business 
Enterprise Architecture, 
(Washington, D.C.: July 7, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 
Longstanding Management and Oversight Weaknesses Continue to Put 
Investments at Risk, 
(Washington, D.C.: Mar. 31, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 
Continued Investment in Key Accounting Systems Needs to be Justified, 
(Washington, D.C.: March 28, 2003).

U.S. General Accounting Office, DOD Business Systems Modernization: 
Improvements to Enterprise Architecture Development and Implementation 
Efforts Needed, 
(Washington, D.C.: Feb. 28, 2003).

U.S. General Accounting Office, DOD Financial Management: Integrated 
Approach, Accountability, Transparency, and Incentives Are Keys to 
Effective Reform, 
(Washington, D.C.: Mar. 6, 2002).

U.S. General Accounting Office, Information Technology: Architecture 
Needed to Guide Modernization of DOD's Financial Operations, 
(Washington, D.C.: May 17, 2001).

[End of section]



[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, inventory management, real property, systems 
modernization, support infrastructure management, and weapon systems 

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

[3] U.S. General Accounting Office, DOD Management: Examples of 
Inefficient and Ineffective Business Processes, GAO-02-873T 
(Washington, D.C.: June 25, 2002).

[4] U.S. General Accounting Office, DOD Excess Property: Risk 
Assessment Needed on Public Sales of Equipment That Could Be Used to 
Make Biological Agents, GAO-04-81TNI (Washington, D.C.: Oct. 7, 2003). 

[5] U.S. General Accounting Office, Defense Logistics: Preliminary 
Observations on the Effectiveness of Logistics Activities during 
Operation Iraqi Freedom, GAO-04-305R (Washington, D.C.: Dec. 18, 2003).

[6] See Related Reports.

[7] U.S. General Accounting Office, Department of Defense: Further 
Actions Needed to Establish and Implement a Framework for Successful 
Financial and Business Management Transformation, GAO-04-551T 
(Washington, D.C.: Mar. 23, 2004) and U.S. General Accounting Office, 
Department of Defense: Further Actions Needed to Establish and 
Implement a Framework for Successful Business Transformation, GAO-04-
626T (Washington, D.C.: Mar. 31, 2004).

[8] 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).

[9] GAO-04-615.

[10] U.S. General Accounting Office, Department of Defense: Status of 
Financial Management Weaknesses and Progress Toward Reform, GAO-03-931T 
(Washington, D.C.: June 25, 2003).

[11] 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).

[12] 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 

[13] FFMIA, Pub. L. No. 104-208, div. A., ß101(f), title VIII, 110 
Stat. 3009, 3009-389 (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. 

[14] The six case study units reviewed include the Colorado B Company 
Special Forces, Virginia B Company Special Forces, West Virginia C 
Company Special Forces, 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, which recently 
returned from Iraq, indicated that some of the same types of pay 
problems that we found in our case studies had also affected soldiers 
in this unit. 

[15] GAO-04-89.

[16] GAO-04-305R.

[17] U.S. General Accounting Office, Defense Inventory: Opportunities 
Exist to Improve Spare Parts Support Aboard Deployed Navy Ships, GAO-
03-887 (Washington, D.C.: Aug. 29, 2003).

[18] GAO-02-873T. 

[19] We characterized as "potentially criminal" any activity related to 
federal tax liability that may be a crime under a specific provision of 
the Internal Revenue Code. Depending on the potential penalty provided 
by statute, the activity could be a felony (punishable by imprisonment 
of more than 1 year) or a misdemeanor (punishable by imprisonment of 1 
year or less). Some potential crimes under the Internal Revenue Code 
constitute fraud because of the presence of intent to defraud, 
intentional misrepresentation or deception, or other required legal 

[20] A "tax period" varies by tax type. For example, the tax period for 
payroll and excise taxes is one quarter of a year. The taxpayer is 
required to file quarterly returns with IRS for these types of taxes, 
although payment of the taxes occurs throughout the quarter. In 
contrast, for income, corporate, and unemployment taxes, a tax period 
is 1 year.

[21] U.S. General Accounting Office, Financial Management: Some DOD 
Contractors Abuse the Federal Tax System with Little Consequence, GAO-
04-95 (Washington, D.C.: Feb. 12, 2004).

[22] U.S. General Accounting Office, Travel Cards: Internal Control 
Weaknesses at DOD Led to Improper Use of First and Business Class 
Travel, GAO-04-229T (Washington, D.C.: Nov. 6, 2003), and U.S. General 
Accounting Office, Travel Cards: Internal Control Weaknesses at DOD Led 
to Improper Use of First and Business Class Travel, GAO-04-88 
(Washington, D.C.: Oct. 24, 2003).

[23] U.S. General Accounting Office, DOD Travel Cards: Control 
Weaknesses Led to Millions of Dollars of Wasted on Unused Airline 
Tickets, GAO-04-398 (Washington, D.C.: Mar. 31, 2004).

[24] U.S. General Accounting Office, DOD Travel Cards: Control 
Weaknesses Resulted in Millions of Dollars of Improper Payments, GAO-
04-576, (Washington, D.C.: June 9, 2004).

[25] 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).

[26] Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 
Stat. 2838, 2843 (Nov. 15, 1990) (codified, as amended, in scattered 
sections of title 31, United States Code).

[27] 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).

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

[29] Subsection 1004 (d) of the Bob Stump National Defense 
Authorization Act for Fiscal Year 2003, Pub. L. No. 107-314, 116 Stat. 
2629 (Dec. 2, 2002), provides that any amount in excess of $1 million 
may be obligated for financial system improvements before approval of 
its enterprise architecture and a supporting transition plan only if 
the DOD Comptroller makes a determination that the improvement is 
necessary for (1) critical national security capability or critical 
safety and security requirements or (2) prevention of significant 
adverse effect on a project that is needed to achieve an essential 
capability. The act further provides that after the architecture is 
approved, the DOD Comptroller must determine before making obligations 
that exceed $1 million for system improvements that such improvements 
are consistent with the enterprise architecture and the transition 

[30] We requested obligational data for fiscal year 2003 for the period 
December 2, 2002, the date of the enactment of the act, through 
September 30, 2003.

[31] GAO-04-615. 

[32] U.S. General Accounting Office, Department of Defense: Further 
Actions Needed to Establish and Implement a Framework for Successful 
Business Transformation, GAO-04-626T (Washington, D.C.: Mar. 31, 2004).

[33] OMB developed the Program Assessment Rating Tool to strengthen the 
process for assessing the effectiveness of programs across the federal 
government. For fiscal year 2004, OMB rated the following 12 defense 
program areas: Air Combat; Airlift; Basic Research; Chemical 
Demilitarization; Communications Infrastructure; Defense Health; 
Energy Conservation Improvement; Facilities Sustainment, Restoration, 
Modernization, and Demolition; Housing; Missile Defense; Recruiting; 
and Shipbuilding. DOD linked metrics for these program areas, which 
represent 20 percent of the department's fiscal year 2004 budget; it 
linked another 20 percent in the 2005 budget and 30 percent in the 2006 
budget, for a total of 70 percent.

[34] In July 2003 we reported that DOD and the military services do not 
have an effective approach to prevent and mitigate equipment corrosion, 
and that DOD's strategic plan should contain clearly defined goals, 
measurable, outcome-oriented objectives, and performance measures. 
(U.S. General Accounting Office, Defense Management: Opportunities to 
Reduce Corrosion Costs and Increase Readiness, GAO-03-753 (Washington, 
D.C.: July 7, 2003)). Similarly, in January 2004 we testified that 
existing processes and controls used to provide pay and allowances to 
mobilized Army Guard personnel prevented DOD from being able to 
reasonably assure timely and accurate payroll payments. We stated that 
DOD needs to establish a unified set of policies and procedures, as 
well as performance measures in the pay area. (U.S. General Accounting 
Office, Military Pay: Army National Guard Personnel Mobilized to Active 
Duty Experienced Significant Pay Problems, GAO-04-413T (Washington, 
D.C.: Jan. 28, 2004)).

[35] GAO-04-731R. 

[36] GAO-03-465.

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

[38] 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. 

[39] GAO-01-525. 

[40] GAO-04-731R.

[41] GAO-03-1018.

[42] GAO-03-458 and GAO-03-1018.

[43] According to logistics domain officials, there are currently about 
3,000 systems just within the logistics domain. Of that amount, about 
1,900 systems have been validated by the DOD components as logistics 
systems--that is, they are not merely a spreadsheet or a report. Such a 
determination has not been made for the other 1,100.

[44] GAO-01-525 and GAO-03-458.

[45] GAO-04-615.

[46] Chemical and Biological Equipment: Preparing for a Toxic 
Battlefield: Hearing Before the House Committee on Government Reform, 
Subcommittee on National Security, Veterans Affairs and International 
Relations, 107TH Cong. 119 (Oct. 1, 2002) (statement of Deputy 
Commander, Defense Supply Center Philadelphia, Mr. George H. Allen).

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

[48] U.S. General Accounting Office, DOD Excess Property: Risk 
Assessment Needed on Public Sales of Equipment That Could Be Used to 
Make Biological Agents, GAO-04-81TNI (Washington, D.C.: Oct. 7, 2003).

[49] GAO-02-873T.

[50] GAO-04-615.

[51] GAO-04-615. 

[52] BSM and LMP have identified and documented 202 and 293 system 
requirements, respectively. For BSM, we reviewed 13 requirements 
related to finance, order fulfillment, planning, and procurement. For 
LMP, we reviewed 12 requirements related to planning and budget 
development, asset management, inventory management, and maintenance 
analysis and planning.

[53] GAO-02-873T. 

[54] GAO-04-615.

[55] GAO-04-551T.

[56] GAO-04-626T.

[57] GAO-04-731R.

[58] GAO-03-192SP.

[59] GAO-04-615.