Defense gets better on business

DOD’s size, incompatible systems still hinder financial management

With an operating budget in excess of $400 billion, and assets and liabilities that exceed those of Exxon, IBM, Ford and Wal-Mart combined, the sheer size of the Defense Department has created massive challenges for attempts to improve financial management.

But as Congress continues to apply pressure for reform, DOD has made significant strides in several areas, department officials say.

For example, more than 200 business systems have now been certified as effectively modernized, with each modernization saving DOD at least $1 million.

“I believe we’re making real progress,” said Theresa McKay, DOD’s deputy chief financial officer, at a Senate Homeland Security and Government Affairs Subcommittee on Federal Financial Management, Government Information, and International Security hearing on DOD financial management earlier this month.

Electronic bill-paying

Systems modernization has resulted in other cost-savings efficiencies as well.
Currently, 95 percent of DOD’s vendor payments now are done electronically, up from 86 percent in 2001, resulting in more than $6 million in savings, according to agency statistics.

And in the area of audit readiness—a long-running weakness for the department—the agency recently completed an accurate and auditable valuation of all of its military equipment.

Since equipment represents 27 percent of all DOD assets, this full valuation is critical, agency officials say.

“This is especially significant, because the department has never before had an accurate valuation of its military equipment,” McKay said.

Indeed, even Government Accountability Office comptroller general David Walker, a frequent critic of DOD’s financial management, has acknowledged some progress on the reform front. At the same Senate hearing, Walker cited DOD’s 2005 issuance of the Financial Improvement and Audit Readiness (FIAR) plan, aimed at improving financial practices. He also praised DOD for recognizing that reform was needed, and for accomplishing some systems modernization.

“The approach that they are taking now is vastly superior to the approach that they were taking before,” Walker told lawmakers.

Yet much work remains, Walker said. He urged DOD to “declare a war on waste” and completely overhaul its legacy information management systems. There are more than 3,000 of these systems still operating at DOD, and their use often requires multiple entries for each procurement transaction, which is highly inefficient, he said.

“There are thousands of outdated, nonintegrated systems that don’t talk to each other. We need to kill or disable all nonessential business information systems,” Walker said.

DOD should switch to a more integrated system by 2012 “at the absolute latest,” he added.

“If this country can send a man to the moon and return him in nine years, then we ought to be able to get our act together in this area in six years,” Walker said.

Taking a broader perspective, Walker argued that the agency also needs a “total business transformation plan,” which would set out comprehensive enterprisewide performance goals.

“The plan I’m talking about is beyond business infrastructure systems,” he said.
Walker did agree with DOD officials that the sheer size of the department—which is the world’s largest procurement agency—made reform efforts especially challenging.

“There are so many layers, and so many players,” Walker said.

Still, reform is critical, he argued, because long-standing issues of poor financial management have left the agency highly vulnerable to fraud and abuse.

“Because of decades-old problems, the Defense Department wastes billions of dollars every year,” Walker said.

Subcommittee chairman Tom Coburn (R-Okla.) concurred with Walker’s assessment.

“If DOD was a privately owned company, it would have been bankrupt a long time ago,” Coburn said.

‘Brick by brick’

In response to Walker’s critique, J. David Patterson, a principal deputy undersecretary of Defense (comptroller), said that DOD was largely in agreement with Walker’s suggested reforms and already had made progress in implementing them.

“We’re attempting to do precisely what [comptroller] general Walker is talking about,” Patterson said.

Overall, Patterson said, DOD has had success in “brick-by-brick” reform, such as the systems modernization that McKay cited.

But making agencywide structural changes becomes “very complex,” due to the size of the agency. DOD occupies more than 600,000 buildings in 146 countries around the globe.

“It’s a matter of, how do you start to put these kind of disciplines in this behemoth we call the Department of Defense?” Patterson said.

What would help in this regard, Walker said, is the creation of a chief management officer at DOD, an executive who could oversee reform efforts agencywide.

However, GAO has called for this several times in the past, to no avail. A bill introduced last year that would have created a deputy secretary for management never got out of the Senate.

Finally, Walker pointed to Brazil as an example of dramatic improvement made in a challenging environment. Once in administrative chaos, Brazil has now established a modern, integrated financial-management system for its entire federal government.
“If they can do it, we can do it,” Walker said.

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