The figures behind this business transformation are ticked off regularly in reports and at hearings on Capitol Hill: 3.5 million employees, 4,700 business systems, $1.3 trillion in assets, 5.2 million inventory items. In 2005, the department’s accounting problems cost taxpayers approximately $13 billion, according to Gregory D. Kutz, managing director of forensic audits and special investigations for the Government Accountability Office.

These numbers, no matter how often repeated, point to the enormity of the task the department has in improving management practices and modernizing systems so it can fully account for the dollars it spends.

And, the clock is ticking.

DOD has promised the White House and lawmakers that it will accurately account for 47 percent of assets and 49 percent of liabilities by fiscal 2007. With its self-imposed October deadline looming, the department has created new strategies for achieving a clean financial bill of health. Among these initiatives is an updated version of a long-term blueprint for business transformation, as well as the implementation of new finance systems.

But for all its promises of business system modernization, not everyone is convinced of DOD’s ability to change its ways. Says Winslow Wheeler, a director of the Straus Military Reform Project at the Center for Defense Information in Washington: “It’s not that DOD flunks audits; it’s that DOD cannot be audited. The books are such a mess … it would be an improvement for DOD to flunk.”

Another factor has been the absence of “meaningful pressure from Congress,” Wheeler says. By recently cutting funding for a clean financial audit, Wheeler says that Congress’s rebel yell to reform DOD’s finance systems is little more than “fodder for fancy congressional press releases.”

The War Factor
Current war efforts are adding to DOD’s financial troubles. As any public entity can attest, crystal-clear financial records offer an in-depth look into a senior official’s day-to-day activities—transparency that is often unappreciated among business leaders.

Dov Zakheim, a vice president at Booz Allen Hamilton Inc. of McLean, Va., was DOD’s comptroller and chief financial officer. He says, “Given the nature of the Defense business, particularly when you get involved in warfare or supporting warfare, you need a little bit of flexibility so [DOD’s] culture was such that openness and visibility were not high priorities.”

Wheeler agrees. “Managers in DOD at various levels do not want to make the books auditable. If you were able to audit across the board you would know who the good, bad and indifferent managers are at the project manager level.”

If recent transformation initiatives are any indication, however, DOD isn’t allowing cultural resistance to prevent it from forging ahead. For starters, the department revamped its Business Enterprise Architecture—the blueprint guiding development and implementation of DOD business management systems toward greater consolidation. Now in its third version, BEA promises to greatly impact DOD’s systems acquisition process.

“If we wanted to get a clean opinion for the Defense Department today, we could do it but it would probably cost us $10 billion to do it in a year.”
—BTA’s Thomas Modly

According to Randolph Hite, GAO’s director of IT architecture and systems issues, previous efforts to coax agencies away from acquiring and implementing stovepiped, redundant and incompatible systems was “like herding cats.” With an “authoritative encyclopedia” such as DOD’s current version of BEA, Hite says the chances for success increase exponentially.

“This version of the architecture takes a pragmatic approach to trying to architect something as big as the Defense Department,” he says. “Prior versions tried to be top-to-bottom, soup-to-nuts, alpha-to-omega coverage of every aspect of what the department does.”

An integral part of today’s BEA is the Standard Financial Information Structure—a standard for categorizing, tracking and processing business transactions. In theory, standard transactional data can help DOD achieve an unqualified audit opinion on consolidated financial statements. Take, for example, DOD’s military equipment, the largest single item on its balance sheet, accounting for 27 percent of the department’s total assets. By dictating how to code and evaluate the cost of tanks, airplanes and destroyers in a consistent and auditable fashion, SFIS has enabled DOD to establish the cost of each item of military equipment in inventory for 1,101 programs—a historic first and a key step toward obtaining a clean audit.

The New Team
Overseeing DOD’s BEA is the Business Transformation Agency. Created in October, BTA manages the 18 largest DOD business programs, spanning from travel and procurement to human resources and cash accounting. The agency has conjured optimism among observers. “The transformation agency has created at least a hope that you could in fact federate [DOD’s] systems, optimize at lower levels and yet keep all its systems sufficiently interlinked. …That’s quite a challenge but I think it’s doable,” Zakheim says.

One of BTA’s greatest challenges in achieving departmentwide financial accountability is revamping some of DOD’s most sophisticated finance systems. The Defense Integrated Military Human Resources System is a case in point. GAO reports 713 HR systems had reported funding for fiscal 2005 of approximately $223 million for modernization and more than $656 million for operation and maintenance. According to DOD officials, DIMHRS will totally or partially replace 113 of these systems. The remaining 600 HR systems must be reviewed in the context of the BEA.

It’s a major undertaking that, if successful, could provide an integrated personnel and pay system for all components of the military services. According to Thomas Modly, deputy undersecretary of Defense for financial management and co-chief of BTA, the Air Force is completing its assessment of implementing DIMHRS, the Navy has just begun its assessment and the Marine Corps will follow after the Navy assessment is done.

“We’ve made great progress with DIMHRS in the last year,” says Modly, adding that DIMHRS will simplify tracking of pay transactions. As it stands, managers must access “multiple systems, many of which don’t talk to each other without some kind of manual intervention.”

Similarly, the Defense Civilian Personnel Data System handles all civilian personnel transactions, including benefits inquiries. The DCPDS replaces as many as 10 of DOD’s legacy personnel data systems and interfaces with the organization’s automated payroll system.

And then there’s the department’s Defense Cash Accountability System. Although not scheduled for full operational capability until September 2007, DCAS aims to consolidate disbursements and collections information from disparate systems across DOD into a single enterprise system. By replacing legacy systems such as the Cash Reconciliation System, the Financial Operations Support System and the International Balance of Payments System, DCAS promises to standardize the process of identifying and reporting to the Treasury Department detailed cash movement within DOD.

“What these integrated systems will allow us to do with common standards is almost instantaneously be able to pull, cut, slice and dice information in all sorts of different ways so that information from authoritative sources can be used by decision-makers,” Modly says.

The Long Haul
DOD still has a long way to go before fully revamping and consolidating its finance systems. In a recent report, GAO criticized Defense for failing to clearly define how DIMHRS will integrate with existing systems because it has not yet determined how many legacy systems will be partially replaced and need modification.

What’s more, adds Hite: “One of our concerns was DIMHRS is intended to be a DOD-wide system, but it’s not being managed as a DOD-wide system. You need to have clear authority and accountability with an entity that could manage [DIMHRS] across all of the services and that wasn’t happening.”

Nor should DOD expect salvation from DIMHRS alone. Even if the department properly deploys and manages the system, Darby Smith, GAO’s assistant director of financial management assurance, warns that DIMHRS “may help resolve personnel pay issues,” but it offers little assistance on “issues relating to inventory management and contract administration.”

“If you were able to audit across the board you would know who the good, bad and indifferent managers are at the project manager level.”
—CDI’s Winslow Wheeler

In fact, McCoy Williams, director of the GAO’s financial management and assurance team, says that department leaders are kidding themselves if they believe that decades of systemic mismanagement can be remedied with technology. “If you put systems in place but you don’t have the right human capital and the proper internal controls, you’re really not going to be any better off than you were before you put the systems in,” he says. “The systems in and of themselves will not fix all of the high-risk problems that the GAO has pointed out over the years within the department.”

For this reason, Williams offers a handful of recommendations, including that those responsible for business systems modernization actually control the funding for DOD business systems. By centralizing funding control, Williams says decision-makers will be more inclined to invest in systems that address common DOD-wide problems.

Williams also calls for the establishment of a chief management official to ensure sustained executive leadership. By replacing fly-by-night political appointees with a full-time, executive-level position filled by an individual appointed by the president and confirmed by the Senate for a set term of seven years, Williams says the department stands a far better chance of maintaining its business transformation momentum. After all, the average political appointee’s tenure is approximately 18 months, which, according to Williams, “in that time frame, you wouldn’t complete a lot of these projects that need to be done in order to get the DOD in a position to achieve financial accountability.”

Centralized funding and executive leadership aside, the success of DOD’s business management reform efforts ultimately hinges on its ability to create change within the department itself and to encourage transparency among managers.

Says Zakheim, “The truth of the matter is, if the culture doesn’t permit it, the systems aren’t really going to be upgraded in time.”

But despite all the hurdles ahead, Modly says he remains optimistic that creation of BTA and its more centralized approach to the department’s financial health make a clean audit not far out on the horizon. As of last June, Modly says, 16 percent of DOD’s assets and 48 percent of its liabilities had been independently verified and given a stamp of approval. DOD hopes to settle its balance sheet on 47 percent of assets and 49 percent of liabilities by 2007. And by 2008, the organization plans to achieve clean audit opinions on 50 percent of assets and 50 percent of liabilities in an efficient and cost-effective manner.

“If we wanted to get a clean opinion for the Defense Department today, we could do it but it would probably cost us $10 billion to do it in a year,” Modly says. “What we’re trying to do is improve our business processes and improve our business systems so we don’t have to spend that kind of money.”

Financial systems modernization at a reasonable price—it’s a long-heard battle cry that, this time around, DOD’s overseers are hoping will ring true.

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