Defense Reform Initiative: Progress, Opportunities, and Challenges

Published by the Government Accountability Office on 1999-03-02.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Military Readiness,
                          Committee on Armed Services, House of Representatives

For Release on Delivery
Expected at               DEFENSE REFORM
1:00 p.m., EST
Tuesday, March 2, 1999    INITIA TIVE

                          Opportunities, and
                          Statement of Barry W.Holman, Associate Director,
                          Defense Management Issues, National Security and
                          International Affairs Division

GAO/T-NSIAD-99-95                      o          /I   6   /6
                   Mr. Chairman and Members of the Subcommittee:

                   I am pleased to be here today to present our observations, based on
                   ongoing and recently completed work, about efforts underway within the
                   Department of Defense (DOD) to reform how it does business. My
                   statement focuses on the various initiatives included in the Defense Reform
                   Initiative (DRI) Report issued by the Secretary of Defense in November

                   The DRI Report outlined a series of initiatives that the Secretary and other
                   DOD officials hope will revolutionize DOD's business affairs by making
                   DOD's current organization and business practices more agile, responsive,
                   and efficient. We strongly endorse the need for DOD to reform its business
                   processes and reduce its support infrastructure costs. DOD officials have
                   expressed the hope that the DRI will eventually provide a major source of
                   annual recurring savings that can be used to help increase funding for
                   weapon systems modernization.

                   Today, as you requested, I would like to (1) outline actions taken by DOD to
                   provide program direction and give momentum to the DRI effort;
                   (2) discuss additional steps that could be taken to facilitate a more
                   comprehensive reform effort; (3) discuss the impact of the current
                   initiatives on the DOD's budget process; (4) highlight progress generally
                   being made in implementing the initiatives; and (5) provide a more detailed
                   discussion about the status of the competitive sourcing initiative.

Results in Brief   The Secretary and the Deputy Secretary of Defense have shown strong
                   support for the DRI program and established an organizational framework
                   to give additional structure and guidance to the effort. Also, using special
                   directives, performance contracts, and planning and budget guidance, DOD
                   has sought to institutionalize and sustain the DRI. DOD's inclusion of the
                   DRI into its plans for implementing the Government Performance and
                   Results Act (Results Act), and its requirements for strategic goals and
                   performance plans, represent an important step toward ensuring a
                   long-term focus on the initiatives and on efforts to track their progress.

                    The Results Act requires federal agencies (including DOD) to set strategic goals, measure
                   performance, and report on the degree to which goals were met. Its intent is to focus agencies more on
                   results, service delivery, and program outcomes. This is expected to provide the Congress and other
                   decisionmakers with objective information on the relative effectiveness and efficiency of federal

                   Page 1                                                                          GAO/T-NSIAD-99-95
Because the DRI framework has been in place for just over a year, it is too
soon for us to assess how effective it will be in the long term. We did,
however, identify several areas where DOD could build on its initial efforts
to give greater impetus to its desire to achieve a "revolution in business
affairs." These include (1) incorporating other major ongoing reform
efforts in the DRI so that DOD can develop a more comprehensive
integrated strategy for reforming defense business and support activities;
(2) better delineating the funding requirements needed to achieve the
major reforms; and (3) enhancing the Department's abilities to measure
DRI results, particularly through needed financial management and related

DOD has projected specific savings for only two of the initiatives, and these
savings have already been factored into DOD's future budget plans. The
two initiatives relate to DOD's desire to conduct additional base closure
rounds in 2001 and 2005, and to open 229,000 government positions to
competition within the public and private sectors over the next several
years. DOD officials expect both initiatives to provide significant savings.
However, a variety of factors suggests that significant short-term savings
from these and other initiatives are uncertain. First, while DOD has
requested, the Congress has not authorized additional base closure rounds
because of concerns about prior rounds. Second, DOD components have
not fully identified the resource requirements needed to conduct the
planned competitive sourcing studies or the personnel separation costs
likely to be associated with implementing the results. Other initiatives also
have significant up-front investment costs that must be offset before net
savings begin to accrue. Further, some initiatives, such as utility and
housing privatization, might be better depicted as helping to avoid future
operating costs and capital outlays, rather than reducing existing budget

The DRI program includes a variety of reform or reengineering initiatives,
many of which were ongoing before they were brought under the DRI
umbrella. To varying degrees, the DRI framework has given them
increased visibility and top-level support within DOD. Yet, each initiative
varies in its progress toward meeting its objectives and milestones, and
some will likely require more time to complete than originally projected by
the DRI. Some initiatives still face challenges that could affect their
ultimate success.

Competitive sourcing is one of the major initiatives, and DOD's plan for this
effort is ambitious. Benefits to be gained from this program are significant

Page 2                                                      GAO/T-NSIAD-99-95
             and savings can be expected. However, in our past work we have raised
             some concerns about the magnitude of savings likely to occur under this
             program in the short and long term. Short-term savings may not be realized
             as quickly as DOD has projected because of the need to offset the up-front
             investment costs associated with implementing this initiative. There is also
             some uncertainty about the extent to which savings initially estimated from
             competitive sourcing studies can be sustained over time based on changes
             that have occurred after competitions were completed, and DOD's lack of a
             system for tracking savings. Additionally, some DOD component officials
             have expressed concerns about the capacity of DOD components to initiate
             and complete so sizeable a study effort in the time frames currently
             established. In many cases, detailed plans for specific positions and
             functions to be studied by individual DOD components have not yet been
             developed. Some officials have expressed uncertainties about the number
             of positions/functions in DOD that are suitable candidates for competitive
             sourcing studies. DOD's new commercial activities inventory that was to
             be provided to the Congress in January 1999, is still pending. This
             inventory is supposed to provide an updated assessment of positions
             suitable for competitive sourcing studies.

Background   The genesis of the DRI was the Quadrennial Defense Review (QDR), which
             was completed in May 1997. Among other actions, the QDR called for DOD
             to reduce its support infrastructure and streamline its business practices.
             The DRI, as a follow-on effort to the QDR, is built around four major reform
             efforts or pillars:

             * Reengineering defense business processes and support functions
               primarily by adopting and applying private sector best practices.
             * Reorganizing and reducing the size of DOD headquarters elements and
               defense agencies, including the Office of the Secretary of Defense.
             * Expanding the use of competitive sourcing to open DOD's commercial
               activities to competition from the private sector.
             * Conducting two additional base realignment and closure (BRAC)
               rounds and eliminating other facilities that are no longer needed and/or
               that drain resources.

             While DOD expected that each of these efforts would reduce support
             infrastructure costs, most savings were to come from two initiatives-
             BRAC and competitive sourcing. These were the only two initiatives for
             which DOD established specific savings goals. At the same time, success in
             implementing these and other initiatives could also be expected to

             Page 3                                                      GAO/T-NSIAD-99-95
                        contribute toward departmentwide plans for significant additional civilian
                        and military personnel reductions. Our July 1998 report on DOD's
                        1999-2003 Future Years Defense Program (FYDP) 2 noted that the services
                        planned to reduce 175,000 military and civilian positions by 2003. 3

                        In implementing the DRI program, DOD has addressed some of the
                        obstacles that have limited the success of past reform efforts by adopting
                        some proven management change concepts. For example, the Secretary
                        and Deputy Secretary have shown strong support for the program and
                        established an organizational framework to give additional structure,
                        guidance, and follow-through to the effort. This framework consists of a
                        Defense Management Council, a "Coordinating Group" to support the
                        Council, and a DRI office to track implementation and surface issues that
                        need management attention. The Council is chaired by the Deputy
                        Secretary of Defense and includes among its membership the
                        Undersecretary of Defense (Comptroller), the Vice-Chairman of the Joint
                        Chiefs of Staff; the other three Under Secretaries of Defense, the three
                        service under secretaries, the four service vice-chiefs, and the Director of
                        the DRI office. The Coordinating Group is also comprised of senior-level
                        representatives from the services and the Office of the Secretary of
                        Defense (OSD) such as the Deputy Director for Army Program Analysis and
                        Evaluation, and the Marine Corps Assistant Deputy Chief of Staff for
                        Requirements and Planning. The Executive Director for the group is the
                        Director for OSD Program Analysis and Evaluation. Several months after
                        the DRI was announced, the Secretary established a small DRI office to
                        help track the implementation of the initiatives and advise him when the
                        reform. efforts were not progressing as expected.

Program Direction and   The Secretary and Deputy Secretary have used a variety of public forums to
Follow Through          give visible support
                        departmental         to theare
                                       executives   DRI  effort.
                                                       using     Additionally,
                                                             a variety of meansthey and the
                                                                                 within  other top
                        Department to communicate the goals and objectives of the DRI program

                        2The FYDP is an authoritative record of current and projected force structure costs and personnel
                        levels approved by the Secretary of Defense. In its annual FYDP documents DOD presents its estimated
                        expenditures and appropriations needs for the budget year for which funds are being requested, at least
                        the 4 years following it, and the 2 years preceding it. The Fiscal Year 1999 FYDP supports the
                        Presidentls fiscal year 1999 budget request.
                         Future Years Defense Program: Substantial Risks Remain in DOD's 1999-2003 Plan (GAO/NSIAD-98-204,
                        July 31, 1998).

                        Page 4                                                                          GAO/T-NSIAD-99-95
and provide program emphasis and direction. The means include
(1) developing DRI directives to communicate specific goals and
objectives, milestones, and decisions for selected initiatives; (2) creating
performance contracts for selected DOD agencies; (3) directing that the
military services and DOD agencies adopt performance plans that address
DRI objectives; and (4) including emphasis on DRI in departmental budget

Defense Reform Initiative Directives (DRID) are coordinated through the
Defense Management Council and issued by the Deputy Secretary of
Defense for selected DRI initiatives. They describe the initiatives and
provide specific direction, including milestones, to the DOD components
responsible for carrying them out. They are a continuation of what DOD
previously called Management Reform Memoranda (MRM), first used by
the Deputy Secretary in early 1997 in his former capacity as Under
Secretary of Defense (Comptroller). As of February 1999, DOD had issued
17 MRMs and 49 DRIDs. Though not issued for all initiatives, they have
been used most frequently to implement organizational changes and to give
directions to actions that cut across multiple organizations.

The DRI report called for the development of performance contracts for
various DOD agencies; such contracts were intended to improve DOD's
oversight of these agencies. The contracts are to include cost cutting and
service improvement goals for each of the agencies, along with specific
performance measures and annual reporting requirements. Four agencies
were selected to pilot the effort in fiscal year 1999; others will be included
in fiscal year 2000.

As you may recall, we testified before this Subcommittee last year
concerning challenges facing DOD as it attempted to implement the DRI.4
In that testimony, we pointed out limitations in DOD's planning processes
related to prior reform efforts and the need for hierarchically linked goals
and performance measures. DOD took an important step toward
addressing these issues as it began to implement the Results Act and its
requirement for strategic and performance plans. A key performance goal
included in DOD's recently issued Results Act Performance Plan for fiscal
year 2000, which we are assessing, is to streamline the DOD infrastructure
by redesigning the DOD's support structure and pursuing business practice

 Defense Management: Challenges Facing DOD in Implementing Defense Reform Initiatives
(GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998).

Page 5                                                                    GAO/r-NSIAD-99-95
                    reforms. DOD also cited a variety of performance indicators that it would
                    track over time, such as percentage of budget spent on infrastructure and
                    the number of public-private sector competitions. This incorporation in
                    the Performance Plan represents an important step toward
                    institutionalizing the initiatives and attempting to track progress.

                    DOD has also emphasized the DRI through its budget guidance. In this
                    respect, the Defense Planning Guidance, which was issued to guide
                    preparation of the fiscal year 1999 Defense budget, directed the services
                    and Defense agencies to construct budgets and programs consistent with
                    the corporate-level goals in the QDR. Further, the planning guidance for
                    the fiscal year 2000-2005 defense program directed the services and DOD
                    agencies to support QDR and DRI goals through the planning process for
                    future years budgets.

                    For the most part, DOD has relied upon its DOD components to provide
                    any needed funding for DRI from their own operating budgets with the
                    promise that they could retain and reallocate savings achieved to other
                    needs. At the same time, anticipated savings from the competitive sourcing
                    initiative are already being reallocated from operating budgets to other
                    needs within the services.

Opportunities to    Because the DRI framework has been in place for just over a year, it is too
                    soon for us to assess how effective it will be in the long term. We did,
Facilitate a More   however, identify several areas where DOD could build on its initial efforts
Comprehensive       to give even greater impetus to its desire to achieve a "revolution in
Reform Effort       business affairs." These areas include (1) incorporating other major
                    ongoing reform efforts in the DRI so it can develop a more comprehensive
                    integrated strategy for reforming defense business and support activities;
                    (2) better delineating the funding requirements needed to achieve the
                    major reforms, and (3) enhancing the Department's abilities to measure
                    DRI results, particularly through needed financial management and related

                    The DRI report did not include all of the Department's ongoing or planned
                    major business process and support activity reform efforts, and several
                    that were included represented small elements of larger reform efforts not
                    under DRI. Some not included are significant and impact many functional
                    areas. Examples include logistics and financial management reforms. Only
                    limited pieces of logistics reform measures, such as expanded use of prime
                    vendor agreements and use of purchase cards, were included in the

                    Page 6                                                       GAO/T-NSIAD-99-95
original DRI report and, except for reducing the number of Defense
Finance and Accounting Service locations, financial management reform
was not discussed. A key aspect of reengineering DOD's logistics process
is the development of modern, reliable logistics information systems.
These systems will also be important feeder systems for DOD's financial
management systems. Thus, these are some areas that could benefit from
increased visibility and discussions in the senior leadership forums
provided by the Defense Management Council. The absence of key
initiatives from DRI also show that DOD's reform efforts, while significant,
have not been brought together to provide as comprehensive and
integrated a plan for defense reform as they might be. Doing so could
provide a more complete picture of major reform efforts that are needed
and planned and, to the extent they are interrelated, provide the basis for
developing a more comprehensive, integrated strategy for achieving them.

Also, an important aspect of any reform effort is the ability to establish
baseline costs and measure the impact of change. Because of the condition
of DOD's financial management systems, obtaining this type of information
is difficult and, in many cases impossible. As a result, DOD tends to rely on
performance indicators that track progress or status rather than measure
results, including any cost savings. While some measures of progress are
necessary to understand what is left to be done, not having information on
results or outcomes makes it difficult for DOD or anyone to determine to
what extent overall goals and objectives are being met and dollar savings
are being achieved.

To gauge the progress of individual DRIs, the DRI office periodically
collects information on them-primarily those with established
performance targets in a MRM or a DRID-and provides feedback to the
Secretary of Defense and the Defense Management Council. Because most
of the tracking information does not come directly from DOD systems, it
must be compiled off-line and it is limited. The DRI Director told us that
his staff is attempting to improve and expand on the collected information
and hopes to develop better performance measures for reporting DRI
progress and results. However, prospects for significant improvements in
DOD's ability to measure the effects of its initiatives and achieved savings
will likely depend more on progress in improving its financial management
and feeder systems-actions that could require several years to complete.

Page 7                                                      GAO/r-NSIAD-99-95
Impact of Current DRI          DOD is relying on its components to provide funding from their operating
                       onDbudgets to implement DRI. Service officials, however, have expressed
         on DOD's
         Program         concern about their ability to fund some of these initiatives, considering
Budget                         other competing priorities. Tradeoffs among competing reform priorities
                               could become more difficult as the magnitude of investment costs for the
                               DRI initiatives becomes more fully known. In addition, it is not clear that
                               DOD knows the total resources that are now being devoted to and required
                               for DRI and other reform initiatives underway. If it did, we believe DOD
                               would be in a better position to know the full impact on its budget. This
                               information would also help DOD make tradeoffs among competing
                               initiatives, considering their potential benefits and objectives. Further, it
                               would also provide an enhanced basis for communicating information
                               about needed reform investment requirements to DOD components and the

                               DOD has estimated savings for only two of the DRI initiatives and it has
                               factored those savings into its future budget plans. These savings are
                               related to DOD's ongoing efforts to conduct public/private competitions
                               over the next several years involving 229,000 government positions
                               currently engaged in commercial activities and DOD's desire to conduct
                               additional base closure rounds in 2001 and 2005. DOD officials expect both
                               initiatives will provide significant short-term and long-term annual
                               recurring savings to the Department. However, a variety of factors
                               suggests that the potential for these and other initiatives under DRI to yield
                               significant short-term savings is likely to be less than expected. First, DOD
                               components have not fully identified the resource requirements needed to
                               complete the planned competitive sourcing studies or personnel separation
                               costs likely to be associated with implementing the results. Second, while
                               DOD has requested them, the Congress has not authorized additional
                               BRAC rounds because of concerns about prior rounds. Third, other
                               initiatives have significant up-front investment costs that must be offset
                               before net savings begin to accrue. Additionally, some of these initiatives,
                               such as utility and housing privatization, might better be depicted as
                               helping to avoid future operating costs and government capital outlays,
                               rather than reducing existing budget levels.

                               We recently reported that DOD's 1999-2003 FYDP incorporated $6.2 billion
                               of estimated savings from competitive sourcing between fiscal years 1997
                               and 2003, but these estimated savings did not fully account for up-front
                               investment costs, which could reduce the amount of estimated savings in

                               Page 8                                                       GAO/T-NSIAD-99-95
the short term.5 In submitting DOD's budget request for fiscal year 2000,
DOD officials increased their projections of cumulative savings from
competitive sourcing to $11 billion and increased the time period out to
fiscal year 2005. The FYDP does provide a fuller estimate of the impact of
investment costs associated with BRAC. For example, the 1999-2003 FYDP
offsets estimated BRAC savings with implementation costs and comes up
with net costs of $832 million for fiscal year 2002 and $1.45 billion for fiscal
year 2003. DOD showed these net costs in the FYDP as a Department-level
contingency account but did not allocate them to individual services.
Beyond the FYDP period, DOD expects the two additional BRAC rounds to
result in about $3.4 billion in annual savings after the closures are
completed and implementation costs have been offset.6

While DOD has not estimated savings from other initiatives under DRI,
several of them are likely to require significant up-front funding to
implement, which could affect the point at which any recurring net savings
might begin to accrue. Among the more significant ones are demolition of
excess buildings, and privatization of housing and utilities on military
bases. In large measure, the major benefit from these initiatives involves
cost avoidance-avoiding upkeep of unneeded buildings and relying on
private sector resources, rather than the government's, for needed capital
investments for new housing and revitalized utilities.

DOD believes that demolishing deteriorating and excess structures will
help reduce operating costs and improve safety. At DOD's direction, the
services are moving forward with plans to demolish 8,000 excess structures
by 2003, and they have set aside funding to accomplish this objective. The
Navy's funding for demolitions increased from $6 million in fiscal year 1996
to $27 million in fiscal year 1998, with additional funding programmed in
future years. Similarly, funding for the Army's program, which involves the
largest share of square footage to be demolished, increased from
$20 million in fiscal year 1997 to $104 million in fiscal year 1998, with
funding to remain at about $100 million per year through 2003. The Army
projects it will demolish 53.2 million square feet of space by 2003, the Navy
9.9 million by 2002, the Air Force 14.9 million by 2003, and the Marine

 Future Years Defense Program: How Savings From Reform Initiatives Affect DOD's 1999-2003 Program
(GAO/NSIAD-99-66, Feb. 25, 1999).
  Future BRAC savings are expressed in fiscal year 1999 dollars and represent savings expected to occur
annually for fiscal year 2012 and beyond, when the two proposed future rounds are projected to be
completed. DOD estimated future savings on the assumption that future costs and savings would be
similar to those of the 1993 and 1995 rounds.

Page 9                                                                           GAO/T-NSIAD-99-95
Corps 2.1 million by 2000. Because demolishing buildings is costly, some
service officials have expressed doubt about the magnitude of savings that
will result from this initiative; many prefer to characterize the long-term
benefit as a cost avoidance. Our prior work on this issue indicates that
demolitions can result in a savings and cost avoidance because they
eliminate the need to maintain unneeded structures and avoid future
outlays for renovations. 7 We also noted, however, that demolition costs
can vary and increase because of the type-of-construction and the extent of
environmental clean-up required. We therefore noted that it is important to
continue to examine the cost-effectiveness of individual projects.

DOD's housing privatization initiative is designed to leverage private sector
resources to address pressing needs for military housing much quicker
than would be possible by relying on traditional military construction
funding. As we reported last year, questions exist about the costs and
savings associated with the new initiative and concerns about the extent to
which this new program will be able to address the full range of military
housing needs. 8 To improve housing faster and more economically, the
Congress authorized the Military Housing Privatization Initiative in 1996 to
encourage private sector financing, ownership, operation, and
maintenance of both military family and unaccompanied housing. The goal
of the program is to speed the revitalization and replacement of military
housing by encouraging the private sector to invest at least $3 for each
$1 that the government invests. In this way, DOD plans to build or renovate
three times as many units compared with the amount renovated under
traditional approaches and, hopefully, eliminate all inadequate housing by
fiscal year 2010.

However, it is unclear what impact the housing privatization program will
have on infrastructure outlays in either the short or long term. Some
up-front investments still will be required. For example, traditional military
construction funding still will be needed as the seed money for
privatization projects and for projects not suitable for privatization. Also,
until many units are renovated or built on bases under the program, DOD
will need substantial outlays to operate and maintain existing units.

7Defense Infrastructure: Demolition of Unneeded Buildings Can Help Avoid Operating Costs
(GAO/NSIAD-97-125, May 13,1997).

8See Military Housing: Privatization Off to a Slow Start and Continued Management Attention Needed
(GAO/NSIAD-98-178, July 17, 1998) and Defense Infrastructure: Challenges Facing DOD in
Implementing Reform Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998).

Page 10                                                                      GAOTr-NSIAD-99-95
Finally, as additional units become privatized, the operations and
maintenance funding savings that DOD realizes largely will be offset by
increased budgeting for the military personnel account to cover the
payment of housing allowances to more families. Several officials believe
that the program may, in fact, be budget neutral.

The services have also been examining the potential to privatize their utility
systems (electric, gas, water, and wastewater) as a means of using
private-sector capital to upgrade these facilities. Since the DRI report was
issued, the services have identified about 1,700 utility systems as potential
privatization candidates, but few of them had been privatized as of
February 1999. 9 Service officials attributed the slow progress to the
up-front work required and stated that each privatization requires
extensive and costly feasibility and environmental studies. Because of the
slow progress, DOD recently extended the DRI goal of privatizing all utility
systems, except those needed for security reasons or those that are
uneconomical to privatize from, January 1, 2000, to September 30, 2003.

DOD recently directed the services to set aside $243.6 million over the next
several years to cover costs of utility privatizations. The program budget
decision, which directed this action, estimated that utility privatization
might begin providing about $327 million in annual savings after the
privatizations are completed but it also stated that the true cost of
implementing the privatizations and savings could not be accurately
estimated until a further analysis was completed. Some service officials
have expressed caution about the extent of actual budget reductions likely
to occur from these privatizations. While some DOD officials believe
reductions in operating costs are likely, others believe they may be offset
by private sector utility rates that would be set to recoup the private
sector's capital investments. In some instances, service officials expressed
concern that the private sector may not agree to take over some utility
systems without the services upgrading them from their deteriorated state.

 Prior to the DRI, the Army had begun efforts to privatize some utilities. Under these prior efforts, it
privatized about 40 utility systems, most of which were natural gas systems.

Page 11                                                                            GAO/T-NSIAD-99-95
General Progress in   Each of the four DRI pillars includes a variety of reform or reengineering
Implementing DRI      initiatives, many of which were already ongoing before being brought
                      under the DRI umbrella. To varying degrees the DRI organization has given
Initiatives           them increased visibility and top-level support within DOD. Yet, each
                      initiative varies in its progress toward meeting its objectives and
                      milestones. Many still face a variety of issues that could affect their
                      ultimate success, and most will likely take longer to complete than the
                      milestones established under the DRI.

                      The one I)RI pillar associated with adopting best business practices
                      included the broadest range of initiatives, from the increased use of
                      electronic commerce to reengineering the movement of household goods.
                      Progress varies among the individual initiatives with the outcome for some
                      uncertain.. Appendix I provides a general overview of the key initiatives,
                      under this pillar.

                      Another DRI pillar involved a series of reductions, reorganizations, and
                      other organizational adjustments primarily within OSD and DOD agencies.
                      The DRI report called for a flatter, more streamlined headquarters
                      throughout DOD that would ensure that OSD focused on core,
                      corporate-level tasks rather than on program management and day-to-day
                      management of subordinate activities. The DRI effort called for reducing
                      OSD personnel by 33 percent-about 1,000 personnel-and DOD agencies
                      by 21 percent-about 27,000 personnel. In numerous instances,
                      implementing direction came from the issuance of DRIDs. Over 30 DRIDs
                      were issued to bring about these reductions and reorganizations within
                      OSD. The 21-percent reduction in DOD agency personnel will be
                      accomplished by initiatives in the other DRI pillars-reengineering,
                      consolidations, and competitive sourcing.

                      DOD organizations are making progress toward meeting DRI-directed staff
                      reduction goals. OSD, for example, has met 80 percent of its goal of
                      reducing OSD personnel. It did this primarily by transferring 506 personnel
                      to other DOD organizations and eliminating 284 positions-a total
                      reduction of 790 personnel. Officials at the Defense Finance and
                      Accounting Service (DFAS), the Defense Information Systems Agency
                      (DISA), and the Defense Logistics Agency (DLA)-three of the largest
                      Defense agencies-showed us plans for achieving their reductions and told
                      us they do not foresee a problem reaching the 21-percent goal by fiscal
                      year 2003. They expect to meet the goal by reengineering and competitive

                      Page 12                                                     GAO/r-NSIAD-99-95
However, not all of the changes have been carried out as, originally planned.
For example, the DRI called for dissolving the Office of the Assistant
Secretary of Defense for Command, Control, Communications, and
Intelligence; transferring its intelligence functions to the newly created
position of Assistant Secretary of Defense for Intelligence; and spinning off
other functions to other areas. DOD reassessed the decision and
subsequently decided not to disband the office, deciding it made better
sense to keep the office in place.

Apart from DRI planned reductions, DOD also continues to develop plans
for implementing a 25-percent reduction in the number of management
headquarters and headquarters support activities between October 1, 1997,
and October 1, 2002. Although DOD intends to meet a portion of these
reductions through the DRI-related cuts, DOD is still trying to determine
how to meet the requirement for additional reductions.

Another DRI pillar called for eliminating unneeded infrastructure and
identified a variety of methods for doing so. They ranged from eliminating
unneeded facilities through additional BRAC rounds to privatizing
functions that DOD believes could be more appropriately handled by the
private sector. Initiatives under this pillar are the ones most directly
related to actual physical reduction of defense facilities infrastructure. Of
these initiatives, BRAC is the most controversial, although it appears to
offer the greatest potential for long-term savings. Two other initiatives
involve reductions in operating locations within DFAS and DISA. DISA is
moving to reduce the number of its megacenter sites from 16 to 6,
reengineering its processes, and establishing 23 regional centers. As of
February 1999, DISA officials reported that their effort is progressing on
schedule, with the number of megacenters reduced to 12 and the regional
centers established. In conjunction with these efforts, DISA's plans call for
total reductions of 893 personnel between fiscal years 1997 and the end of
fiscal year 2000. As of February 1999, DISA reported that it had eliminated
869 positions, 97 percent of its goal.

Under DRI, DFAS planned to eliminate 8 of its 19 operating locations. After
the DRI report was issued, DFAS assessed the extent of excess capacity in
its current structures-it expects to have 34 percent excess capacity by the
end of fiscal year 2003-and identified a set of criteria that could be used to
evaluate which locations to close. However, recent legislation enacted as
part of the Fiscal Year 1999 Strom Thurmond National Defense
Authorization Act added requirements that DFAS must consider as it
assesses its infrastructure requirements. It also required a report to the

Page 13                                                      GAOIr-NSIAD-99-95
                        House and Senate Committees on Armed Services providing a strategic
                        plan for improving the financial management operations at each of the
                        DFAS operating locations. That report, originally expected in January
                        1999, is now expected to be submitted by March 15, 1999. Appendix II
                        provides a summary status for this and other initiatives under this DRI
                        pillar. The remaining pillar is discussed in the next section.

Status of Competitive   DOD has an ambitious plan for implementing its competitive sourcing
Sourcing Initiative     program under DRI. Our prior work shows the likelihood of savings from
                        this effort, but as already indicated, has raised some questions about the
                        magnitude of those savings. Service officials have expressed some
                        concerns about their ability to execute the magnitude of studies planned
                        over the next few years, as well as uncertainty over the number of positions
                        suitable for study. OSD has issued guidance to Defense components urging
                        efforts to develop more definitive study plans for their competitive
                        sourcing studies, and has identified a number of steps to stimulate progress
                        in implementing this initiative.

                        DOD's fiscal year 2000 budget plans call for competitively examining about
                        229,000 positions between fiscal years 1997 and 2005 for potential
                        conversion to the private sector.1 0 It previously projected that this effort
                        would produce $6 billion in cumulative savings by 2003, but more recently
                        increased it to $11 billion by 2005 and revised the projection of subsequent
                        annual recurring savings to more than $3 billion each year thereafter. DOD
                        officials told us that the competitive sourcing issue is one that has
                        consumed the greatest amount of attention by members of the Defense
                        Management Council at their meetings.

                        We have monitored this issue and provided the Congress with a variety of
                        reports since DOD began its renewed emphasis on competitive sourcing.
                        We believe there are significant benefits to be gained from this program,
                        particularly the emphasis on creating more efficient operations regardless
                        of who wins these competitions. While we believe that competitive
                        sourcing competitions will produce savings, we have urged caution
                        regarding -the magnitude of savings likely to be achieved in the short and
                        long term. We have reported that short-term savings may not be realized as

                           Data available from DOD in recent months concerning the number of positions expected to be studied
                        have varied from 225,000 to 237,000 and the time frames for completing them extended from 2003 to

                        Page 14                                                                        GAO/T-NSIAD-99-95
quickly as DOD has projected because of the need to offset the up-front
investment costs associated with implementing this initiative.1 l DOD
components have not fully calculated the investment costs associated with
undertaking these competitions, or the personnel separation costs likely to
be associated with implementing them. We have noted that prior savings
estimates, which provide a basis for current estimates, were based on
initial savings estimates from competitive sourcing competitions.
However, the initial savings estimate can change over time with changes in
scope of work or mandated wage changes. 12 We have also reported that
DOD's data systems provide an inadequate basis for tracking changes in
savings from competitive sourcing that may occur over time.1 3 DOD is
working to address this issue.

Some uncertainties exist about the capacity of DOD's components to
initiate and complete so sizeable a study effort as now planned within the
established time frames. In many cases, detailed plans for specific
positions and functions to be studied by individual DOD components have
not been developed. Additionally, delays in launching previously projected
studies, and some service projections of greater times anticipated to
complete them than previously planned, could add pressure to complete
even larger numbers of studies in succeeding years-adding to an already
heavy resource requirement in this area.

Uncertainties also exist about the number of positions/functions in DOD
that are suitable candidates for competitive sourcing studies. Some
DOD-sponsored studies have suggested that the numbers of military and
government civilian personnel perform work involving commercial type
activities are greater than the 229,000 positions currently planned for study.
However, various officials have urged caution about the potential for
significantly large numbers of positions to be competed, believing that
positions must be studied in the context of functions, and that many
functions may not be suitable for outsourcing for various reasons. DOD's
new commercial activities inventory that was to be provided to the
Congress in January 1999 is still pending.

"IDOD Competitive Sourcing: Ouestions About Goals, Pace. and Risks of Key Reform Initiative
(GAO/NSIAD-99-46, Feb. 22, 1999).

12See Defense Management: Challenges Facing DOD in Implementing Defense Refonn Initiatives
(GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998) and Base Operations: Challenges Confronting DOD as It
Renews Emphasis on Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997).

13DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23, 1999).

Page 15                                                                      GAO/T-NSIAD-99-95
The Deputy Secretary of Defense issued a DRID on January 16, 1998,
dealing with this initiative. It called for the services and DOD agencies to
update their inventories of positions involving commercial activities and to
differentiate between activities involving functions deemed inherently
governmental in nature that should remain in-house and those that could
be subject to A-76 competitions. The DRID established a January 1999
reporting date to the Congress. The House Committee on Armed
Services,1 4 in its report on a bill providing for fiscal year 1999 defense
authorizations, had requested a similar type of analysis. As of February
1999, DOD officials were still preparing the report.

The Deputy Secretary of Defense, in a December 1998 memorandum,
addressed to the secretaries of the military departments and other key
leaders, stressed the importance of achieving the projected savings from
competitive sourcing. He stressed the need for components to submit their
fiscal year 1999 competition plans and more general competitive sourcing
master plans for the fiscal years 2001-2005 period, accounting for functions
and numbers of positions to be competed. He also emphasized the
importance of a number of actions to be taken to improve implementation
of this program, among them were the following:

* completing the review underway to identify those functions that are
  commercial in nature and that could be opened up for competition
  under the A-76 process;
* identifying best practices for completing competitions;
* preparing standardized templates for performance work statements;
* formulating performance work statements that allow for innovative
  approaches to performance of functions;
* employing multi-disciplinary expert teams for engagement at critical
  milestones in the A-76 process;
* exercising, where possible, the waiver and exemption authorities in
  OMB Circular A-76 to convert commercial functions directly to
  contractor performance; and
* improving management information systems to enhance the collection
  and maintenance of data required for visibility into program planning
  and execution.

 4The Committee was formerly known as the House Committee on National Security.

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The Deputy Secretary concluded by stating that the competitive sourcing
program holds the promise of making a major contribution to DOD's
revolution in business affairs.

Mr. Chairman, in closing let me state, as we have in the past, our strong
support for efforts to reform DOD's business processes. The organizational
framework the Secretary and the Deputy Secretary have put in place is key
to providing a sustained emphasis on the important reforms underway.
Issues and concerns I have raised are based on our experience in
examining some of the areas undergoing reform and are intended to
strengthen DOD's efforts. However, we believe it important to sound
cautionary notes, as appropriate, about the potential for expecting too
much too soon in some areas. Consequently, it will be important for DOD
to carefully track implementation of these initiatives and make resource
and other management decisions as necessary to guide the program as it

This concludes my prepared remarks. I would be pleased to answer any
questions that you or Members of the Subcommittee might have.

Page 17                                                   GAO/T-NSIAD-99-95
Appendix I

Best Business Practices Initiatives

Initiative               Goal/milestone                            Status                                    Issues
Paperless contracting    Make all aspects of the major             Integrated process team established to    Establishing a standard
                         weapon systems contracting process        plan and coordinate work in the           process, interfacing
                         paperless by January 1, 2000,             services and Defense agencies. DOD        automated data processing
                         through increased application of          will not meet deadline of January 1,      (ADP) systems, and
                         computer technology.                      2000. DOD estimates meeting the           coordinating complementary
                                                                   goal during 2003.                         efforts among many offices
                                                                                                             involved are difficult,
                                                                                                             time-consuming tasks.
Purchase cards           By fiscal year 2000, buy 90 percent Services and agencies have steadily             Increasing card usage will
                         of goods and services costing $2,500 increased the use of the purchase              require some reengineering;
                         or less using the purchase card.     card. In fiscal year 1998, DOD doubled         90 percent goal will be difficult
                                                              the number of potential transactions for       to meet. DOD is exploring
                                                              which card use is directed.                    benefits and risks of
                                                                                                             increasing dollar limit to
                                                                                                             $10,000 or $25,000.
Electronic malls         Expand the use of electronic malls.       DLA and the services have started         DOD is working on integrating
                         Allow for on-line payment with            several electronic malls that allow       existing sites into a single,
                         purchase cards by July 1998. Use          on-line purchase from suppliers.          DOD-wide mall in accordance
                         purchase cards for all purchases by       Others planned. On-line payment           with congressional direction in
                         January 1, 2000.                          capability in place.                      the FY 1999 National Defense
                                                                                                             Authorization Act.
Prime vendors            Increase the use of prime vendors for     Limited progress expected in              Services have not embraced
                         DLA-managed items. Have prime             expanding use of prime vendors for all    the concept to extent needed
                         vendor contracts for facility             classes of consumable items.              to reach goal. DLA has not
                         maintenance supplies available for all    Contracts for facility maintenance        yet expanded contracts to
                         installations in the U.S. by January 1,   supplies are in place for potential use   cover many of the items it
                         1999.                                     by military services.                     manages.
Total asset visibility   A key part of achieving "just in time"    DOD continues long-standing efforts to    Initiative is highly complex,
(TAV)                    logistics. DOD is committed to            achieve TAV capability but unlikely to    heavily dependent on
                         providing TAV. In-theater TAV to be       meet year 2000 goal for in-theater TAV.   systems in development, and
                         fully operational in year 2000.           DOD logistics strategic plan states that  has been an objective for
                                                                   TAV will be totally implemented by        DOD for over 25 years.
                                                                   February 2004.
Travel system            Implement new system for official         Significant progress made. However,      Initial contract serving 1 of 18
reengineering            DOD travel by October 2000.               full implementation throughout DOD is regions in U.S. awarded in
                                                                   not expected until 2001.                 spring 1998. Results of
                                                                                                            previous pilots promising.
Household goods          Reengineer processes for moving           Limited pilot projects under way or      Optimum approach yet to be
transportation           military personnel and their families.    about to be started that will test       determined. Plans for
                                                                   improved approaches to moving            evaluating success of each
                                                                   household goods of service members. option still evolving. Impact
                                                                                                            on small businesses remains
                                                                                                            a contentious issue.

                                              Page 18                                                                    GAO/T-NSIAD-99-95
Appendix II

Initiatives to Eliminate Infrastructure

Initiative                       Goal/deadline                     Status                           Issues
Base closures                    Hold additional rounds in 2001    Congress has not authorized      Congressional concerns about
                                 and 2005.                         additional base closure rounds. prior rounds have produced
                                                                                                    reluctance to approve additional
Defense Information Systems     Reduce number of data centers DISA expects to have revised          Effort also involves
Agency (DISA) consolidations   from 16 to 6.                    structure in place by fiscal        reengineering activities and
                                                                year 2000.                         establishing 23 regional centers,
                                                                                                   using existing infrastructure.
Defense Finance and             Reduce number of operating      DFAS estimates excess capacity Section 914 of the FY 1999
Accounting Service (DFAS)      locations by eight.              of 34 percent by fiscal            National Defense Authorization
eliminations                                                    year 2003. Study of operating      Act added new requirements
                                                                locations is underway; study is to that DFAS must consider when
                                                                be completed by March 15,          assessing infrastructure and
                                                                1999.                              deciding which locations to
Laboratories, test, and        No goals or deadlines given.     DOD is developing plan for         Issue currently linked to potential
evaluation facilities                                           restructuring in accordance with for future BRAC rounds.
                                                                Section 912(c) of the FY 1998
                                                                National Defense Authorization
Demolitions                    Demolish excess structures.      All services expect to reach       Progress attributed to
                               Each service has specific goals goals by deadlines.                 management attention being
                               for amount of square footage to                                     given to this issue and,
                               be demolished, with completion                                      especially, to extent of funding
                               dates ranging from year 2000 to                                     being set aside for demolitions.
                               year 2003.
Regional energy demonstrations Develop plan for demonstrations Plans submitted. Three              Defense Energy Support Center,
                               by June 1, 1998.                 demonstrations completed.          which is managing the
                                                                More expected.                     demonstrations, is also working
                                                                                                   with services on utility
Utilities privatization        Privatize all utilities by       Services will not meet deadline. Effort is complex,
                               January 1, 2000.                                                    time-consuming and expensive.
                                                                                                   DMC subsequently extended
                                                                                                   deadline to September 30, 2003.
Housing privatization          Privatize:                       Services will not meet goals.      Effort is complex and time-
                               3,500 units by FY 1998                                              consuming.
                               15,000 units by FY 1999
                               30,000 by FY 2000
                               Eliminate all inadequate housing
                               by 2010.

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