oversight

Defense Transformation: Preliminary Observations on DOD's Proposed Civilian Personnel Reforms

Published by the Government Accountability Office on 2003-04-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States General Accounting Office

GAO                          Testimony
                             Before the Subcommittee on Civil Service and
                             Agency Organization, Committee on Government
                             Reform, House of Representatives


For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, April 29, 2003      DEFENSE
                             TRANSFORMATION
                             Preliminary Observations
                             on DOD’s Proposed Civilian
                             Personnel Reforms
                             Statement of David M. Walker,
                             Comptroller General of the United States




GAO-03-717T
                                                April 29, 2003


                                                DEFENSE TRANSFORMATION

                                                Preliminary Observations on DOD’s
 Highlights of GAO-03-717T, testimony
 before the Subcommittee on Civil Service
                                                Proposed Civilian Personnel Reforms
 and Agency Organization, Committee on
 Government Reform, House of
 Representatives




DOD is in the midst of a major                  Many of the basic principles underlying DOD’s civilian human capital proposals
transformation effort including a               have merit and deserve serious consideration. The federal personnel system is
number of initiatives to transform              clearly broken in critical respects—designed for a time and workforce of an
its forces and improve its business             earlier era and not able to meet the needs and challenges of our current rapidly
operations. DOD’s legislative                   changing and knowledge-based environment. DOD’s proposal recognizes that,
initiative would provide for major              as GAO has stated and the experiences of leading public sector organizations
changes in the civilian and military            here and abroad have found strategic human capital management must be the
human capital management, make                  centerpiece of any serious government transformation effort.
major adjustments in the DOD
acquisition process, affect DOD’s               More generally, from a conceptual standpoint, GAO strongly supports the need
organization structure, and change              to expand broad banding and pay for performance-based systems in the federal
DOD’s reporting requirements to                 government. However, moving too quickly or prematurely at DOD or elsewhere,
Congress, among other things.                   can significantly raise the risk of doing it wrong. This could also serve to
                                                severely set back the legitimate need to move to a more performance and
DOD’s proposed National Security                results- based system for the federal government as a whole. Thus, while it is
Personnel System (NSPS) would                   imperative that we take steps to better link employee pay and other personnel
provide for wide-ranging changes                decisions to performance across the federal government, how it is done, when it
in DOD’s civilian personnel pay and             is done, and the basis on which it is done, can make all the difference in whether
performance management,                         or not we are successful. In our view, one key need is to modernize
collective bargaining, rightsizing,             performance management systems in executive agencies so that they are
and a variety of other human                    capable of supporting more performance-based pay and other personnel
capital areas. The NSPS would                   decisions. Unfortunately, based on GAO’s past work, most existing federal
enable DOD to develop and                       performance appraisal systems, including a vast majority of DOD’s systems, are
implement a consistent DOD-wide                 not currently designed to support a meaningful performance-based pay system.
civilian personnel system.
                                                The critical questions to consider are: should DOD and/or other agencies be
This testimony provides GAO’s
                                                granted broad-based exemptions from existing law, and if so, on what basis; and
preliminary observations on
aspects of DOD’s legislative                    whether they have the institutional infrastructure in place to make effective use
proposal to make changes to its                 of the new authorities. This institutional infrastructure includes, at a minimum,
civilian personnel system and                   a human capital planning process that integrates the agency’s human capital
poses critical questions that need              policies, strategies, and programs with its program goals and mission, and
to be considered.                               desired outcomes; the capabilities to effectively develop and implement a new
                                                human capital system; and, importantly, a set of adequate safeguards, including
                                                reasonable transparency and appropriate accountability mechanisms to ensure
                                                the fair, effective, and credible implementation of a new system.

                                                In our view, Congress should consider providing governmentwide broad banding
                                                and pay for performance authorities that DOD and other federal agencies can
                                                use provided they can demonstrate that they have a performance management
                                                system in place that meets certain statutory standards, which can be certified to
                                                by a qualified and independent party, such as OPM, within prescribed
                                                timeframes. Congress should also consider establishing a governmentwide fund
                                                whereby agencies, based on a sound business case, could apply for funding to
                                                modernize their performance management systems and ensure that those
 www.gao.gov/cgi-bin/getrpt?GAO-03-717T.        systems have adequate safeguards to prevent abuse. This approach would serve
                                                as a positive step to promote high-performing organizations throughout the
 To view the full report, including the scope
 and methodology, click on the link above.
                                                federal government while avoiding fragmentation within the executive branch in
 For more information, contact Derek Stewart    the critical human capital area.
 at (202) 512-5559 or stewartd@gao.gov.
Chairwoman Davis, Mr. Davis, and Members of the Subcommittee:

It is a pleasure to appear before you today to provide our preliminary
observations on the Department of Defense’s (DOD) proposed National
Security Personnel System (NSPS) included as part of the Defense
Transformation for the 21st Century Act of 2003. As you know, DOD is in
the midst of a major transformation and it has undertaken a number of
related initiatives to transform its forces and fundamentally improve its
business operations. As part of DOD’s transformation process, the
Secretary of Defense and senior civilian and military leaders have
committed to adopt a capabilities-based approach to acquisition planning
and to improve the linkage between overall strategy and individual
investments. At the same time, DOD has embarked on a series of efforts to
achieve strategic savings and improve its business processes, including
financial management, support infrastructure reforms to include base
closures, information technology modernization, logistics reengineering,
and strategic human capital management. In that regard, I am pleased to
serve as an observer to the Defense Business Practice Implementation
Board. Notwithstanding these ongoing efforts, GAO has reported a range
of DOD challenges for many years. In addition, DOD also is covered by
several of GAO’s governmentwide high-risk areas, including the area of
strategic human capital management.

The proposed Defense Transformation for the 21st Century Act of 2003
represents a substantive legislative proposal that has both significant
precedent-setting implications for the government and far-reaching
implications on the way DOD is managed. Specifically, the critical
questions are whether DOD and/or other agencies should be granted
broad-based exemptions from existing law, and if so, on what basis; and
do agencies have the institutional infrastructure in place to make effective
use of the new authorities they are seeking. DOD’s legislative initiative
would, among other things, provide for major changes in civilian and
military human capital management, make important adjustments to the
DOD acquisition process, affect DOD’s organization structure, and change
DOD’s reporting requirements to Congress.

As a starting point, and as agreed with the Subcommittee, today I will
provide our preliminary observations on DOD’s legislative proposal to
make changes to its civilian personnel system. The proposed NSPS would
provide for wide-ranging changes in DOD’s civilian personnel pay and
performance management, collective bargaining, rightsizing, and a variety
of other human capital areas. The NSPS would enable DOD to develop and
implement a consistent, DOD-wide civilian personnel system bringing

Page 1                                                          GAO-03-717T
together the many disparate systems that exist today. The proposal, while
providing a section-by-section analysis, does not provide an adequate
justification given the significance of the proposed changes. In addition, it
is my understanding that a document containing a fully developed
justification for the proposed changes is not available. At the same time, it
our understanding that DOD’s current thinking is that NSPS will be based
on the work done by DOD’s Human Resources Best Practices Task Force.
The Task Force reviewed federal personnel demonstration projects and
selected alternative personnel systems to identify practices that it
considered promising for a DOD civilian human resources strategy. These
practices were outlined in a April 2, 2003, Federal Register notice asking
for comment on DOD’s plan to integrate all of its current science and
technology reinvention laboratory demonstration projects under a single
human capital framework consistent with the best practices DOD
identified.1

Many of the basic principles underlying DOD’s civilian human capital
proposals have merit and deserve serious consideration. The federal
personnel system is clearly broken in critical respects—designed for a
time and workforce of an earlier era and not able to meet the needs and
challenges of our current rapidly changing and knowledge-based
environment. DOD’s proposal recognizes that, as GAO has stated and the
experiences of leading public sector organizations here and abroad have
found, strategic human capital management must be the centerpiece of
any serious government transformation effort.

Human capital reforms at DOD obviously have important implications for
national security. However, given the massive size of DOD and the nature
and scope of the changes that are being considered, DOD’s proposal also
has important precedent-setting implications for federal human capital
management generally and should also be considered in that context. The
critical questions raised are should DOD and/or other agencies be granted
broad-based exemptions from existing law, and if so, on what basis; and
whether they have the institutional infrastructure in place to make
effective use of the new authorities. This institutional infrastructure
includes, at a minimum, a human capital planning process that integrates
the agency’s human capital policies, strategies, and programs with its
program goals and mission, and desired outcomes; the capabilities to
effectively develop and implement a new human capital system; and


1
 68 Fed. Reg. 16,119-16,142 (2003).



Page 2                                                           GAO-03-717T
                         importantly a set of adequate safeguards, including reasonable
                         transparency and appropriate accountability mechanisms, to ensure the
                         fair, effective, and credible implementation and application of a new
                         system.

                         Consistent with this view, we have long held that the first step toward
                         meeting the government’s human capital challenges is for agency leaders
                         to identify and make use of all the appropriate administrative authorities
                         available to them to manage their people for results, undertaken as part of
                         and consistent with proven change management practices. Much of the
                         authority agency leaders need to manage human capital strategically is
                         already available under current laws and regulations. This includes the
                         ability to develop modern, effective, and credible performance
                         management systems that would support more performance-based pay
                         decisions. The second step is for policymakers to pursue incremental
                         legislative reforms to give agencies additional tools and flexibilities to hire,
                         manage, and retain the human capital they need, particularly in critical
                         occupations. The third step is for all interested parties to work together to
                         identify, based in part on the experiences of the incremental reforms and
                         demonstration projects, the kinds of comprehensive legislative reforms in
                         the human capital area that should be enacted over time, taking into
                         account the extent to which existing approaches make sense in the
                         current and future operating environment. 2


                         With almost 700,000 civilian employees on its payroll, DOD is the second
Observations on          largest federal employer of civilians in the nation, after the Postal Service.
Selected Provisions of   Defense civilian personnel, among other things, develop policy, provide
                         intelligence, manage finances, and acquire and maintain weapon systems.
the Proposed NSPS        Given the current global war on terrorism, the role of DOD’s civilian
                         workforce is expanding, such as participation in combat support functions
                         that free military personnel to focus on warfighting duties for which they
                         are uniquely qualified. Civilian personnel are also key to maintaining
                         DOD’s institutional knowledge because of frequent rotations of military
                         personnel. However, since the end of the Cold War, the civilian workforce
                         has undergone substantial change, due primarily to downsizing, base
                         realignments and closures, competitive sourcing initiatives, and DOD’s
                         changing missions. For example, between fiscal years 1989 and 2002, DOD



                         2
                         U.S. General Accounting Office, Human Capital: Building on the Current Momentum to
                         Address High-Risk Issues, GAO-03-637T (Washington, D.C.: April 8, 2003).



                         Page 3                                                                GAO-03-717T
                        reduced its civilian workforce by about 38 percent, with an additional
                        reduction of about 55,000 personnel proposed through fiscal year 2007.
                        Some DOD officials have expressed concern about a possible shortfall of
                        critical skills because downsizing has resulted in a significant imbalance in
                        the shape, skills, and experience of its civilian workforce while more than
                        50 percent of the civilian workforce will become eligible to retire in the
                        next 5 years. As a result, the orderly transfer of DOD’s institutional
                        knowledge is at risk.

                        These factors, coupled with the Secretary of Defense’s significant
                        transformation initiatives, make it imperative for DOD to strategically
                        manage its civilian workforce based on a total force perspective which
                        includes civilian personnel as well as active duty and reserve military
                        personnel and contractor personnel. This strategic management approach
                        will enable DOD to accomplish its mission by putting the right people in
                        the right place at the right time and at a reasonable cost.

                        NSPS is intended to be a major component of DOD’s efforts to more
                        strategically manage its workforce and respond to current and emerging
                        challenges. This morning I will highlight several of the key provisions of
                        NSPS that in our view are most in need of close scrutiny as Congress
                        considers the DOD proposal.


Providing the Wide-     The DOD proposal would allow the Secretary of Defense to jointly
Ranging Authority to    prescribe regulations with the Director of the Office of Personnel
Design a New Civilian   Management (OPM) to establish a flexible and contemporary human
                        resources management system for DOD—NSPS. The joint issuance of
Personnel System        regulations is similar to that set forth in the Homeland Security Act of
                        20023 between the Secretary of Homeland Security and the Director of
                        OPM for the development of the Department of Homeland Security (DHS)
                        human resources management system. However, unlike the legislation
                        creating DHS, the Defense Transformation for the 21st Century Act would
                        allow the Secretary of Defense to waive the requirement for joint issuance
                        of regulations if, in his or her judgment, it is “essential to the national
                        security”—which is not defined in the act. While the act specifies a
                        number of key provisions of Title 5 that shall not be altered or waived,
                        including those concerning veterans’ preference, merit protections, and
                        safeguards against discrimination and prohibited personnel practices, the


                        3
                         Pub. L. No. 107-296, Nov. 25, 2002.



                        Page 4                                                           GAO-03-717T
                          act nonetheless would, in substance, provide the Secretary of Defense
                          with significant independent authority to develop a separate and largely
                          autonomous human capital system for DOD.

                          The DOD proposal also has significant potential implications for
                          governmentwide human capital policies and procedures and for OPM as
                          the President’s agent and advisor for human capital matters and overseer
                          of federal human capital management activities.4 In essence, the act would
                          allow for the development of a personnel system for the second largest
                          segment of the federal workforce that is not necessarily within the control
                          or even direct influence of OPM. To strike a better balance between
                          reasonable management flexibility and the need for a reasonable degree of
                          consistency and adequate safeguards to prevent abuse throughout the
                          government, Congress should consider making these provisions of the
                          Defense Transformation for the 21st Century Act consistent with the
                          Homeland Security Act of 2002, or at a minimum, providing some statutory
                          guidance on what would constitute a situation “essential to the national
                          security” that would warrant the Secretary of Defense to act independently
                          of the Director of OPM.


Implementing Pay Reform   DOD states that it needs a human capital management system that
and Performance           provides new and increased flexibility in the way it assesses and
Management                compensates its employees, and toward that end, we understand that in
                          implementing NSPS DOD plans to strengthen its performance appraisal
                          systems and implement pay banding approaches as core components of
                          any new DOD human capital system. We have a long and successful
                          experience in using pay banding with our analyst staff as a result of the
                          GAO Personnel Act of 1980. Certain DOD components have had a number
                          of years of experience with pay banding through OPM’s personnel
                          demonstration projects, authorized by the Civil Service Reform Act of
                          1978, to test and introduce beneficial change in governmentwide human
                          resources management systems. For example, in 1980, the Navy personnel
                          demonstration project, commonly referred to as the China Lake
                          demonstration project, implemented a number of reforms including pay
                          banding and a pay for performance system. More recently, the Civilian
                          Acquisition Workforce personnel demonstration project (AcqDemo) was



                          4
                           We discuss OPM’s human capital leadership role in our report: Major Management
                          Challenges and Program Risks: Office of Personnel Management, GAO-03-115
                          (Washington, D.C.: January 2003).



                          Page 5                                                                  GAO-03-717T
implemented in 1999 and created a pay banding system that covers part of
its civilian acquisition, technology, and logistics workforce.5 The expected
results of AcqDemo’s pay banding system include increased flexibility to
assign employees as well as increased pay potential and satisfaction with
advancement for employees. According to agency officials, an evaluation
to OPM on AcqDemo’s progress is scheduled to be available this June.
Lastly, DOD’s science and technology reinvention laboratory
demonstration projects all implemented some form of pay banding and
pay for performance. OPM reports that these reinvention laboratory
demonstration projects have been able to offer more competitive starting
salaries. Additionally some labs’ turnover experience was significantly
lower among highly-rated employees and higher among employees with
lower ratings.6 DOD’s demonstration projects clearly provide helpful
insights and valuable lessons learned in connection with broad banding
and pay for performance efforts. At the same time these projects and
related DOD efforts involve less than 10 percent of DOD’s civilian
workforce and expanding these concepts to the entire department will
require significant effort and likely need to be implemented in phases over
several years.

As you know, there is growing agreement on the need to better link
individual pay to performance. Establishing such linkages is essential if we
expect to maximize the performance and assure the accountability of the
federal government for the benefit of the American people. As a result,
from a conceptual standpoint, we strongly support the need to expand
broad banding approaches and pay for performance-based systems in the
federal government. However, moving too quickly or prematurely at DOD
or elsewhere can significantly raise the risk of doing it wrong. This could
also serve to severely set back the legitimate need to move to a more
performance and results-based system for the federal government as a
whole. Thus, while it is imperative that we take steps to better link
employee pay to performance across the federal government, how it is
done, when it is done, and the basis on which it is done can make all the
difference in whether or not such efforts are successful. In our view, one
key need is to modernize performance management systems in executive
agencies so that they are capable of adequately supporting more


5
U.S. General Accounting Office, Acquisition Workforce: Status of Agency Efforts to
Address Future Needs, GAO-03-55 (Washington, D.C.: Dec. 18, 2002).
6
U.S. Office of Personnel Management, 2002 Summative Evaluation: DOD S&T
Reinvention Laboratory Demonstration Program (Washington, D.C.: August 2002).



Page 6                                                                    GAO-03-717T
performance-based pay and other personnel decisions. Unfortunately,
based on GAO’s past work, most existing federal performance appraisal
systems, including a vast majority of DOD’s systems, are not designed to
support a meaningful performance-based pay system.

The bottom line is that in order to receive any additional performance-
based pay flexibility for broad based employee groups, agencies should
have to demonstrate that they have modern, effective, credible, and, as
appropriate, validated performance management systems in place with
adequate safeguards, including reasonable transparency and appropriate
accountability mechanisms, to ensure fairness and prevent politicalization
and abuse.

At your request Madam Chairwoman, and that of Senator Voinovich, we
identified key practices leading public sector organizations both here in
the United States and abroad have used in their performance management
systems to link organizational goals to individual performance and create
a “line of sight” between an individual’s activities and organizational
results.7 These practices can help agencies develop and implement
performance management systems with the attributes necessary to
effectively support pay for performance.

More specifically, Congress should consider establishing statutory
standards that an agency must have in place before it can implement broad
banding or a more performanced-based pay program. As the request of
Congressman Danny Davis, we developed an initial list of possible
safeguards to help ensure that any additional flexibility Congress may
grant for expanding pay for performance management systems in the
government are fair, effective, and credible. We provided an initial list to
Congressman Davis late last week. This initial list of safeguards was
developed based on our extensive body of work looking at the
performance management practices used by leading public sector
organizations both in the United States and in other countries as well as
our own experiences at GAO in implementing a modern performance
management system for our own staff. We believe that the following could
provide a starting point for developing a set of statutory safeguards in




7
  U.S. General Accounting Office, Results-Oriented Cultures: Creating a Clear Linkage
between Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).



Page 7                                                                  GAO-03-717T
    connection with any additional efforts to expand pay for performance
    systems.

•   Assure that the agency’s performance management systems (1) link to the
    agency’s strategic plan, related goals, and desired outcomes, and (2) result
    in meaningful distinctions in individual employee performance. This
    should include consideration of critical competencies and achievement of
    concrete results.
•   Involve employees, their representatives, and other stakeholders in the
    design of the system, including having employees directly involved in
    validating any related competencies, as appropriate.
•   Assure that certain predecisional internal safeguards exist to help achieve
    the consistency, equity, nondiscrimination, and nonpoliticization of the
    performance management process (e.g., independent reasonableness
    reviews by Human Capital Offices and/or Offices of Opportunity and
    Inclusiveness or their equivalent in connection with the establishment and
    implementation of a performance appraisal system, as well as reviews of
    performance rating decisions, pay determinations, and promotion actions
    before they are finalized to ensure that they are merit-based; internal
    grievance processes to address employee complaints; and pay panels
    whose membership is predominately made up of career officials who
    would consider the results of the performance appraisal process and other
    information in connection with final pay decisions).
•   Assure reasonable transparency and appropriate accountability
    mechanisms in connection with the results of the performance
    management process (e.g., publish overall results of performance
    management and pay decisions while protecting individual confidentiality,
    and report periodically on internal assessments and employee survey
    results).

    The above items should help serve as a starting point for Congress to
    consider in crafting possible statutory safeguards for executive agencies’
    performance management systems. OPM would then issue guidance
    implementing the legislatively defined safeguards. The effort to develop
    such safeguards could be part of a broad-based expanded pay for
    performance authority under which whole agencies and/or employee
    groups could adopt broad-banding and move to more pay for performance
    oriented systems if certain conditions are met. Specifically, the agency
    would have to demonstrate, and OPM would have to certify, that a
    modern, effective, credible, and, as appropriate, validated performance
    management system with adequate safeguards, including reasonable
    transparency and appropriate accountability mechanisms, is in place to
    support more performance-based pay and related personnel decisions
    before the agency could implement a new system. In this regard OPM

    Page 8                                                          GAO-03-717T
                            should consider adopting class exemption approaches and OPM should be
                            required to act on any individual certifications within prescribed time
                            frames (e.g., 30-60 days). This approach would allow for a broader-based
                            yet more conceptually consistent approach in this critical area. It would
                            also facilitate a phased-implementation approach throughout government.
                            The list is not intended to cover all the attributes of a modern, results-
                            oriented performance management system. Rather, the items on the list
                            cover possible safeguards for performance management systems to help
                            ensure those systems are fair, effective, and credible.

                            Congress should also consider establishing a governmentwide fund
                            whereby agencies, based on a sound business case, could apply for funds
                            to modernize their performance management systems and ensure those
                            systems have adequate safeguards to prevent abuse. This approach would
                            serve as a positive step to promote high-performing organizations
                            throughout the federal government while avoiding fragmentation within
                            the executive branch in the critical human capital area.


Establishing Senior         The Senior Executive Service (SES) needs to lead the way in the federal
Executive Service Pay and   government’s effort to better link pay to performance. We have reported
Performance Management      that there are significant opportunities to strengthen efforts to hold senior
                            executives accountable for results.8 In particular, more progress is needed
                            in explicitly linking senior executive expectations for performance to
                            results-oriented organizational goals and desired outcomes, fostering the
                            necessary collaboration both within and across organizational boundaries
                            to achieve results, and demonstrating a commitment to lead and facilitate
                            change. These expectations for senior executives will be critical to keep
                            agencies focused on transforming their cultures to be more results-
                            oriented, less hierarchical, more integrated, and externally focused and
                            thereby be better positioned to respond to emerging internal and external
                            challenges, improve their performance, and assure their accountability.

                            Given the state of agencies’ performance management systems, Congress
                            should consider starting federal results-oriented pay reform with the SES.
                            In that regard and similar to the Homeland Security Act, the proposed
                            NSPS would increase the current total allowable annual compensation
                            limit for senior executives up to the Vice President’s total annual



                            8
                             U.S. General Accounting Office, Results-Oriented Cultures: Using Balanced Expectations
                            to Manage Senior Executive Performance, GAO-02-966 (Washington, D.C.: Sept. 27, 2002).



                            Page 9                                                                   GAO-03-717T
                            compensation. However, the Homeland Security Act provides that OPM,
                            with the concurrence of the Office of Management and Budget, certify that
                            agencies have performance appraisal systems that, as designed and
                            applied, make meaningful distinctions based on relative performance.
                            NSPS does not include such a certification provision. Congress should
                            consider requiring OPM to certify that the DOD SES performance
                            management system makes meaningful distinctions in performance and
                            employs the other practices used by leading organizations to develop
                            effective performance management systems that I mentioned earlier,
                            before DOD could increase the annual compensation limit for senior
                            executives.9


Employees and Employee      The proposed Defense Transformation for the 21st Century Act includes
Organizations Involvement   provisions intended to ensure collaboration with employee representatives
in Creating NSPS            in the planning, development, and implementation of a human resources
                            management system. For example, employee representatives are to be
                            given the opportunity to review and make recommendations on the
                            proposed NSPS. The Secretary of Defense and the Director of OPM are to
                            provide employee representatives with a written description of the
                            proposed system, give these representatives at least 30 calendar days to
                            review and make recommendations on the proposal, and fully and fairly
                            consider each recommendation. DOD may immediately implement the
                            parts of the proposed system that did not receive recommendations or
                            those recommendations they chose to accept from the employee
                            representatives. While these provisions are designed to help assure that
                            employees and their authorized representatives play a meaningful role on
                            the design and implementation of any new human capital system, DOD
                            does not have a good track record in reaching out to key stakeholders. In
                            fact, it is my understanding that neither DOD employees nor their
                            authorized representatives played a meaningful role in connection with the
                            design of the legislative proposal that is the subject of this hearing.

                            For the recommendations from the employee representatives that the
                            Secretary and the Director do not accept, the Secretary and the Director
                            are to notify Congress and meet and confer with employee representatives
                            in an attempt to reach agreement on how to proceed with these
                            recommendations. If an agreement has not been reached after 30 days, and
                            the Secretary determines that further consultation with employee


                            9
                             GAO-03-488.



                            Page 10                                                       GAO-03-717T
                        representatives will not produce agreement, the Secretary may implement
                        any or all parts of the proposal, including any modifications made in
                        response to the recommendations. The Secretary is to notify Congress of
                        the implementation of any part of the proposal, any changes made to the
                        proposal as a result of recommendations from the employee
                        representatives, and the reasons why implementation is appropriate.

                        Although the procedures called for in the DOD proposal are similar to
                        those enacted in the Homeland Security Act, the latter states explicitly the
                        intent of Congress on the importance for employees to be allowed to
                        participate in a meaningful way in the creation of any human resources
                        management system affecting them. To underscore the importance that
                        Congress places on employee involvement in the development and
                        implementation of NSPS, Congress should consider including similar
                        language as that found in the Homeland Security Act.

                        More generally, and aside from the specific statutory provisions on
                        consultation, the active involvement of employees will be critical to the
                        success of NSPS. We have reported that the involvement of employees
                        both directly and indirectly is crucial to the success of new initiatives,
                        including implementing a pay for performance system.10 High-performing
                        organizations have found that actively involving employees and
                        stakeholders, such as unions or other employee associations when
                        developing results-oriented performance management systems helps
                        improve employees’ confidence and belief in the fairness of the system
                        and increases their understanding and ownership of organizational goals
                        and objectives. This involvement must be early, active, and continuing if
                        employees are to gain a sense of understanding and ownership for the
                        changes that are being made.


Attracting Key Talent   The legislation has a number of provisions designed to give DOD flexibility
                        to help obtain key critical talent. Specifically, it allows DOD greater
                        flexibility to (1) augment the use of temporary appointment authorities,
                        (2) hire experts and consultants and pay them special rates, (3) define
                        benefits for overseas employees, and (4) enter into personal services
                        contracts for experts and consultants for national security missions,


                        10
                         U.S. General Accounting Office, Insights for U.S. Agencies from Other Countries’
                        Performance Management Initiatives, GAO-02-862 (Washington, D.C.: Aug. 2, 2002) and
                        Human Capital: Practices That Empowered and Involved Employees, GAO-01-1070
                        (Washington, D.C.: Sept. 14, 2001).



                        Page 11                                                                 GAO-03-717T
                           including for service outside of the United States. Specifically, the
                           Secretary would have the authority to establish a program to attract highly
                           qualified experts in needed occupations with the flexibility to establish the
                           rate of pay, eligibility for additional payments, and terms of the
                           appointment. These authorities give DOD considerable flexibility to obtain
                           and compensate individuals and exempt them from several provisions of
                           current law. While we have strongly endorsed providing agencies with
                           additional tools and flexibilities to attract and retain needed talent, the
                           broad exemption from some existing ethics and other personnel
                           authorities without prescribed limits on their use raises some concern.
                           Accordingly, Congress should consider placing numerical or percentage
                           limitations on the use of these provisions or otherwise specifically outline
                           basic safeguards to ensure such provisions are used appropriately.


Rightsizing and            The proposed Defense Transformation for the 21st Century Act would
Organizational Alignment   provide the Secretary with a number of broad authorities related to
                           rightsizing and organizational alignment. These include authorizing the
                           Secretary to restructure or reduce the workforce by establishing programs
                           using voluntary early retirement eligibility and separation payments, or
                           both. In addition, the Secretary would be allowed to appoint U.S. citizens
                           who are at least 55 years of age to the excepted service for a period of 2
                           years, with a possible 2-year extension, subject only to certain provisions
                           preventing displacement of current employees. The proposal also provides
                           that annuitants who receive an annuity from the Civil Service Retirement
                           and Disability Fund and become employed in a position within the
                           Department of Defense shall continue to receive their unreduced annuity.
                           This and selected other NSPS provisions will clearly have incremental
                           budget implications for which we have not seen any related cost estimate.
                           Furthermore, this and other selected NSPS provisions would create an
                           unlevel playing field for experienced talent within the civilian workforce.

                           Authorities such as voluntary early retirements have proven to be effective
                           tools in strategically managing the shape of the workforce. I have
                           exercised the authority that Congress granted me to offer voluntary early
                           retirements in GAO in both fiscal years 2002 and 2003 as one element of
                           our strategy to shape the GAO workforce. However, given DOD’s past
                           efforts in using existing rightsizing tools, there is reason to be concerned
                           that DOD may struggle to effectively manage additional authorities that
                           may be provided. While DOD has used existing authorities in the past to
                           mitigate the adverse effects of force reductions, the approach to
                           reductions was not oriented toward strategically shaping the makeup of
                           the workforce. We have previously reported that the net effect of lack of

                           Page 12                                                          GAO-03-717T
attention to workforce shaping is a civilian workforce that is not balanced
by age or experience, which risks the orderly transfer of institutional
knowledge.11 DOD thus may be challenged in using new authorities in a
cohesive, integrated way that supports achieving mission results, absent a
comprehensive and integrated human capital strategy and workforce plan.

In the past, OPM has managed its authority to reemploy an annuitant with
no reduction in annuity on a case-by-case basis. The NSPS proposal, which
broadly grants such treatment, raises basic questions about the intent and
design of the federal benefits or total compensation of federal employees
and obviates the importance of establishing an effective DOD partnership
with OPM in prescribing the use of this authority. As noted previously,
providing such authority only to DOD would provide DOD a competitive
advantage in the market place that would place other agencies at a
disadvantage. It would also involve incremental costs that have yet to be
estimated. Flexible approaches to shaping the workforce, such as 2-year
excepted service appointments, may be helpful in avoiding long-term
commitments for short-term requirements, addressing transition gaps, and
smoothing outsourcing strategies. At the same time, these authorities
represent tools that are not effective on their own, rather they are
elements that need to be developed into an effective strategy and aligned
with program goals and missions.

The legislation could also allow DOD to revise Reduction-in-Force (RIF)
rules to place greater emphasis on an employee’s performance. DOD has
indicated that it will be considering for application DOD-wide, personnel
practices that were identified in the April 2, 2003, Federal Register notice.
This notice describes revised RIF procedures that change the order in
which employees would be retained under a RIF order. Specifically,
employees could be placed on a retention list in the following order: type
of employment (i.e., permanent, temporary), level of performance, and
veterans’ preference eligibility (disabled veterans will be given additional
priority), which we note would reduce the order in which veterans’
preference is currently provided. While we conceptually support revised
RIF procedures that involve much greater consideration of an employee’s
performance, as I pointed out above, agencies must have modern, effective
and credible performance management systems in place to properly
implement such authorities.



11
 U.S. General Accounting Office, Strategic Approach Should Guide DOD Civilian
Workforce Management, GAO/T-GGD/NSIAD-00-120 (Washington, D.C.: Mar. 9, 2000).



Page 13                                                               GAO-03-717T
Establishing Employee   The proposed NSPS would allow the Secretary, after consultation with the
Appeals Procedures      Merit Systems Protection Board (MSPB), to prescribe regulations
                        providing fair treatment in any appeals brought by DOD employees
                        relating to their employment. The proposal states that the appeals
                        procedures shall ensure due process protections and expeditious handling,
                        to the maximum extent possible. In this regard, the proposal provides that
                        presently applicable appeals procedures should only be modified insofar
                        as such modifications are designed to further the fair, efficient, and
                        expeditious resolution of matters involving DOD employees. This
                        provision is substantially the same as a similar provision in the Homeland
                        Security Act of 2002 allowing DHS to prescribe regulations for employee
                        appeals related to their employment. As required of the Secretary of DHS,
                        the Secretary of Defense would be required to consult with MSPB prior to
                        issuing regulations. However, neither the Homeland Security Act nor the
                        proposed legislation expressly requires that employee appeals be heard
                        and decided by the MSPB. There is also no express provision for judicial
                        review of decisions regarding employee appeals decisions.

                        Given the transparency of the federal system dispute resolution and its
                        attendant case law, the rights and obligations of the various parties
                        involved is well developed. It is critical that any due process changes that
                        are implemented after consultation with MSPB result in dispute resolution
                        processes that are not only fair and efficient but, as importantly, minimize
                        any possible perception of unfairness.


                        The critical need for an institutional infrastructure to develop and support
Building the            change has been a consistent theme raised throughout the observations I
Institutional           have been providing on some of the specific aspects of the proposed
                        NSPS. This institutional infrastructure includes, at a minimum, a human
Infrastructure Needed   capital planning process that integrates the department’s human capital
to Support NSPS         policies, strategies, and programs with DOD’s mission, goals, and desired
                        outcomes; the capabilities to effectively develop and implement a new
                        human capital system; and a set of adequate safeguards, including
                        reasonable transparency and appropriate accountability mechanisms to
                        ensure the fair and merit-based implementation and application of a new
                        system. Quite simply, in the absence of the right institutional
                        infrastructure, granting additional human capital authorities will provide
                        little advantage and could actually end up doing damage if the new
                        flexibilities are not implemented properly. Our work looking at DOD’s
                        strategic human capital planning efforts and our work looking across the
                        federal government at the use of human capital flexibilities and related



                        Page 14                                                         GAO-03-717T
                          human capital efforts underscores the critical steps that DOD needs to
                          take to properly develop and effectively implement any new personnel
                          authorities.


Strategic Human Capital   Our work here and abroad has consistently demonstrated that leading
Planning at DOD           organizations align their human capital approaches, policies, strategies,
                          and programs with their mission and programmatic goals. Human capital
                          plans that are aligned with mission and program goals integrate the
                          achievement of human capital objectives with the agency’s strategic and
                          program goals. Careful and thoughtful human capital planning efforts are
                          critical to making intelligent competitive sourcing decisions. The
                          Commercial Activities Panel, which I was privileged to chair, called for
                          federal sourcing policy to be “consistent with human capital practices
                          designed to attract, motivate, retain, and reward a high performing
                          workforce” and highlighted a number of human capital approaches to help
                          achieve that objective.12

                          In April 2002, DOD published a strategic plan for civilian personnel.13
                          However, as we reported in March 2003,14 top-level leadership at the
                          department and the component levels has not until recently been
                          extensively involved in strategic planning for civilian personnel; however,
                          civilian personnel issues appear to be a higher priority for top-level leaders
                          today than in the past. Although DOD began downsizing its civilian
                          workforce more than a decade ago, top-level leadership has not, until
                          recently, developed and directed reforms to improve planning for civilian
                          personnel. With the exception of the Army and the Air Force, neither the
                          department nor the components in our March review had developed


                          12
                           Commercial Activities Panel, Improving the Sourcing Decisions of the Government
                          (Washington, D.C.: April 2002).
                          13
                            Civilian Human Resources Strategic Plan 2002-2008. At this time, DOD also published
                          two strategic plans for military personnel (one addressing military personnel priorities and
                          one addressing quality of life issues for service members and their families). In a December
                          2002 report (Military Personnel: Oversight Process Needed to Help Maintain Momentum
                          of DOD’s Strategic Human Capital Planning, GAO-03-237), we addressed aspects of the
                          two plans concerning benefits for active duty military personnel, noting that the plans were
                          incomplete and that DOD needed a process to oversee the plans’ implementation.
                          14
                             U.S. General Accounting Office, DOD Personnel: DOD Actions Needed to Strengthen
                          Civilian Human Capital Strategic Planning and Integration with Military Personnel
                          and Sourcing Decisions, GAO-03-475 (Washington, D C.: Mar. 28, 2003) and DOD
                          Personnel: DOD Comments on GAO’s Report on DOD’s Civilian Human Capital Strategic
                          Planning, GAO-03-690R (Washington, D.C.: Apr. 18, 2003).



                          Page 15                                                                      GAO-03-717T
strategic plans to address challenges affecting the civilian workforce until
2001 or 2002, which is indicative of civilian personnel issues being an
emerging priority.

In addition, we reported that top-level leaders in the Air Force, the Marine
Corps, the Defense Contract Management Agency, and the Defense
Finance and Accounting Service have been or are working in partnership
with their civilian human capital professionals to develop and implement
civilian strategic plans; such partnership is increasing in the Army and not
as evident in the Navy. Moreover, DOD’s issuance of its departmentwide
civilian human capital plan begins to lay a foundation for strategically
addressing civilian human capital issues; however, DOD has not provided
guidance on aligning the component-level plans with the department-level
plan to obtain a coordinated focus to carry out the Secretary of Defense’s
transformation initiatives in an effective manner. High-level leadership
attention is critical to developing and directing reforms because, without
the overarching perspective of such leaders as Chief Operating Officers
and the Chief Human Capital Officers, reforms may not be sufficiently
focused on mission accomplishment, and without their support, reforms
may not receive the resources needed for successful implementation. We
have previously reported that the concept of a Chief Operating Officer
(COO) could offer the leadership to help elevate attention on key
management issues and transformational change, integrate these various
efforts, and institutionalize accountability for addressing management
issues and leading transformational change both within and between
administrations.15 In our view, DOD is a prime candidate to adopt this COO
concept. In addition, if Congress provides DOD with many of the
flexibilities it is seeking under the NSPS, the basis for adding a COO
position at DOD would be even stronger.

Despite the progress that has been made recently, the DOD human capital
strategic plans we reviewed, for the most part, were not fully aligned with
the overall mission of the department or respective components, results
oriented, or based on data about the future civilian workforce. For
example, the goals and objectives contained in strategic plans for civilian
personnel were not explicitly aligned with the overarching missions of the
respective organizations. Consequently, it is difficult to determine whether



15
   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).



Page 16                                                                   GAO-03-717T
DOD’s and the components’ strategic goals are properly focused on
mission achievement. In addition, none of the plans contained results-
oriented performance measures that could provide meaningful data
critical to measuring the results of their civilian human capital initiatives
(i.e., programs, policies, and processes). Thus, DOD and the components
cannot gauge the extent to which their human capital initiatives contribute
to achieving their organizations’ mission. Also, for the most part, the
civilian human capital plans in our review did not contain detailed
information on the skills and competencies needed to successfully
accomplish future missions. Without information about what is needed in
the future workforce, it is unclear if DOD and its components are
designing and funding initiatives that are efficient and effective in
accomplishing the mission, and ultimately contributing to force readiness.

Lastly, the DOD civilian strategic plans we reviewed did not address how
the civilian workforce will be integrated with their military counterparts or
with sourcing initiatives. At the department level, the strategic plan for
civilian personnel was prepared separately from corresponding plans for
military personnel and not integrated to form a seamless and
comprehensive strategy and did not address how DOD plans to link its
human capital initiatives with its sourcing plans, such as efforts to
outsource non-core responsibilities. For the most part, at the component
level, the plans set goals to integrate planning for the total workforce, to
include civilian, military, and contractor personnel. The Air Force and the
Army, in particular, have begun to integrate their strategic planning efforts
for civilian and military personnel, also taking contractor responsibilities
into consideration. Without integrated planning, goals for shaping and
deploying civilian, military, and contractor personnel may not be
consistent with and support each other. Consequently, DOD and its
components may not have the workforce with the skills and competencies
needed to accomplish tasks critical to assuring readiness and achieving
mission success.

In our March report we recommended, among other things, that DOD
improve future revisions and updates to the departmentwide strategic
human capital plan by more explicitly aligning its elements with DOD’s
overarching mission, including performance measures, and focusing on
future workforce needs. DOD only partially concurred with our
recommendation, and, as explanation, stated that the recommendation did
not recognize the involvement in and impact of DOD’s Quadrennial
Defense Review on the development of the departmentwide plan. We also
recommended that DOD develop a departmentwide human capital
strategic plan that integrates both military and civilian workforces and

Page 17                                                          GAO-03-717T
                             takes into account contractor roles and sourcing initiatives. DOD did not
                             concur with this recommendation stating that it has both a military and
                             civilian plan, and the use of contractors is just another tool to accomplish
                             the mission, not a separate workforce with separate needs to manage. The
                             intent of our recommendation is not to say that DOD has a direct
                             responsibility to manage contractor employees, but rather to recognize
                             that strategic planning for the civilian workforce should be undertaken in
                             the context of the total force—civilian, military, and contractors—since
                             the three workforces need to perform their responsibilities in a seamless
                             manner to accomplish DOD’s mission. In commenting on our
                             recommendations, the Under Secretary of Defense for Personnel and
                             Readiness stated that DOD is in the early stages of its strategic planning
                             efforts. We recognize this and believe that our recommendations represent
                             opportunities that exist to strengthen its developing planning efforts.


The Capabilities Needed to   Our work has identified a set of key practices that appear to be central to
Effectively Develop and      the effective use of human capital authorities. These practices, which are
Implement Human Capital      shown in figure 1, center on effective planning and targeted investments,
                             involvement and training, and accountability and cultural change.16
Flexibilities




                             16
                               U.S. General Accounting Office, Human Capital: Effective Use of Flexibilities Can
                             Assist Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6,
                             2002).



                             Page 18                                                                   GAO-03-717T
Figure 1: Key Practices for Effective Use of Human Capital Flexibilities




                                          Congress should consider the extent to which an agency is capable of
                                          employing these practices before additional human capital flexibilities are
                                          implemented. In the context of NSPS, Congress should consider whether
                                          and to what extent DOD is using those practices.


Adequate Safeguards,                      I have discussed throughout my statement today the importance of moving
Reasonable Transparency,                  to a new human capital system which provides reasonable management
and Appropriate                           flexibility along with adequate safeguards, reasonable transparency, and
                                          appropriate accountability mechanisms to prevent abuse of employees. In
Accountability                            addition to the suggestions made above, Congress should consider
                                          requiring DOD to fully track and periodically report on its performance.
                                          This requirement would be fully consistent with those contained in our




                                          Page 19                                                        GAO-03-717T
               calendar year 2000 human capital legislation, which required us to
               comprehensively assess our use of the authorities granted to us under the
               act.17 More generally, Congress should consider requiring DOD to
               undertake evaluations that are broadly modeled on the evaluation
               requirements of OPM’s personnel demonstration program. Under the
               demonstration project authority, agencies must evaluate and periodically
               report on results, implementation of the demonstration project, cost and
               benefits, impacts on veterans and other EEO groups, adherence to merit
               principles, and extent to which the lessons from the project can be applied
               elsewhere, including governmentwide. This evaluation and reporting
               requirement would facilitate congressional oversight of NSPS, allow for
               any mid-course corrections in its implementation, and serve as a tool for
               documenting best practices and sharing lessons learned with employees,
               stakeholders, other federal agencies, and the public. DOD has stated that it
               would continue its evaluation of the science and technology reinvention
               laboratory demonstration projects when they are integrated under a single
               human capital framework.


               In summary, DOD’s civilian human capital proposals raise several critical
Concluding     questions. Should DOD and/or other federal agencies be granted broad-
Observations   based exemptions from existing law, and if so, on what basis? Does DOD
               have the institutional infrastructure in place to make effective use of the
               new authorities? This institutional infrastructure includes, at a minimum, a
               human capital planning process that integrates the agency’s human capital
               policies, strategies, and programs with its program goals and mission, and
               desired outcomes; the capabilities to effectively develop and implement a
               new human capital system; and a set of adequate safeguards, including
               reasonable transparency and appropriate accountability mechanisms to
               ensure the fair, effective, and credible implementation and application of a
               new system.

               Many of the basic principles underlying DOD’s civilian human capital
               proposals have merit and deserve the serious consideration they are
               receiving here today and will no doubt be received by others in the coming



               17
                 Our October 2000 legislation gave us tools to realign our workforce in light of mission
               needs and overall budgetary constraints; correct skills imbalances; and reduce high-grade,
               managerial, or supervisory positions without reducing the overall number of GAO
               employees. This legislation allowed us to create a technical and scientific career track at a
               compensation level consistent to the SES. It also allowed us to give greater consideration
               to performance and employee skills and knowledge in any RIF actions.



               Page 20                                                                        GAO-03-717T
weeks and months. However, the same critical questions should be posed
to the DOD proposal. Should DOD and/or other federal agencies be
granted broad-based exemptions from existing law, and if so, on what
basis? In addition, Congress and DOD should carefully assess the degree
to which DOD has the institutional infrastructure in place to make
effective use the new authorities it is seeking. Our work has shown that
while progress has been and is being made, additional efforts are needed
by DOD to integrate its human capital planning process with the
department’s program goals and mission. The practices that have been
shown to be critical to the effective use of flexibilities provide a validated
roadmap for DOD and Congress to consider. Finally, as I have pointed out
in several key areas, Congress should consider, if the authorities are
granted, establishing additional safeguards to ensure the fair, merit-based,
transparent, and accountable implementation and application of NSPS.

In our view, Congress should consider providing governmentwide broad
banding and pay for performance authorities that DOD and other federal
agencies can use provided they can demonstrate that they have a
performance management system in place that meets certain statutory
standards, which can be certified to by a qualified and independent party,
such as OPM. Congress should also consider establishing a
governmentwide fund whereby agencies, based on a sound business case,
could apply for funds to modernize their performance management
systems and ensure that those systems have adequate safeguards to
prevent abuse. This would serve as a positive step to promote high-
performing organizations throughout the federal government while
avoiding further fragmentation within the executive branch in the critical
human capital area.

This morning, I have offered some preliminary observations on some
aspects of the proposal. However, these preliminary observations have not
included some serious concerns I have with other sections of the proposed
legislation that go beyond the civilian personnel proposal. My observations
have included suggestions for how Congress can help DOD effectively
address its human capital challenges and ensure that NSPS is designed and
implemented in an effective, efficient, and fair manner that meets the
current and future needs of DOD, its employees, and the American people.
Human capital reforms at DOD obviously have important implications for
national security and precedent-setting implications for governmentwide
human capital management. Given the massive size of DOD and the
magnitude of the nature and scope of the changes that are being
considered, such reform at DOD also has important precedent-setting



Page 21                                                           GAO-03-717T
                  implications for federal human capital management generally and should
                  be considered in that context.

                  We look forward to continuing to support Congress and work with DOD in
                  addressing the vital transformation challenges it faces. Madam
                  Chairwoman and Mr. Davis, this concludes my prepared statement. I
                  would be pleased to respond to any questions that you may have.


                  For further information on human capital issues at DOD, please contact
Contacts and      Derek Stewart, Director, Defense Capabilities and Management on (202)
Acknowledgments   512-5559 or at stewartd@gao.gov. For further information on
                  governmentwide human capital issues, please contact J. Christopher
                  Mihm, Director, Strategic Issues, on (202) 512-6806 or at mihmj@gao.gov.
                  Individuals making key contributions to this testimony included William
                  Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith
                  Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H.
                  Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe.




(450212)
                  Page 22                                                        GAO-03-717T
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