Like a second marriage, each new Department of Defense financial-management reform initiative represents the triumph of hope over experience. The DoD, with more than $1 trillion in assets, 3.3 million employees, and a budget of $417 billion for fiscal year 2005, is the largest single business organization on the planet. That it can't accurately close its books is not surprising. That it continues to try is not surprising. The surprise is that after three elaborate attempts to transform its financial and business-management processes since 1986 — together costing at least $35 billion by some estimates — the department seems not much better off than it was two decades ago.
Officials think the fourth time may be the charm. "We will get a clean audit in 2007," says Linda Furiga, comptroller of the Defense Logistics Agency (DLA), which is responsible for much of the department's procurement, supplies, and distribution. She calls the agency's experience with the newest reform effort, the Business Management Modernization Program (BMMP), "the most exciting time we've had in many years. It's like they've shone a light on accounting."
But can the world's largest business organization finally approach the transparency and integration of its private-sector brethren? True, the BMMP, which is overseen by DoD comptroller Tina Westby Jonas, has high-level support, starting with Defense Secretary Donald Rumsfeld. And advances in Internet and enterprise-resource-planning (ERP) systems make real integration and interoperability among services more feasible. Still, the dismal history of past reform efforts argues for doubts.
In 1985, in light of the infamous $600 ashtray scandal, President Reagan's Blue Ribbon Commission on Defense Management was charged with streamlining financial and acquisition policies. Two years later, the executive leading the reforms resigned, calling the Pentagon "not prepared to change the status quo."
Then, in 1989, Deputy Defense Secretary Donald Atwood launched the Corporate Information Management Initiative with great fanfare. Its target was $36 billion in savings by 1995, but a Clinton Administration study later threw cold water on its work, citing significant resistance to the initiative's proposed changes. Most were essentially abandoned, after soaking up $20 billion in spending in eight years.
The cost-focused Defense Reform Initiative followed in 1997, spearheaded by President Clinton's Defense Secretary, William Cohen. Because the individual services and Pentagon agencies were expected to foot the bill, with each one implementing its suggestions, no accurate accounting exists of what was accomplished or how much was spent on the initiative. According to a report issued several years ago by the General Accounting Office (GAO, now called the Government Accountability Office), it failed because its leadership, drawn from the DoD's various segments, couldn't put their individual interests aside to focus on departmentwide reform.
Four years later, in 2001, Secretary Rumsfeld ordered the latest study of department financial management. Its findings resulted in the BMMP.
Impregnable Walls
Complicating today's BMMP financial reforms, of course, are other challenges the DoD must meet, starting with the Iraq War and encompassing questions about its Halliburton relationship, Air Force-Boeing tanker-plane contracts, and revolving-door employment agreements involving government personnel, to name just three.
But while the Pentagon's size and complexity may excuse some of the financial-reform failures, the core problem is more fundamental. "The department has never come to grips with what it is," says Dov Zakheim, DoD comptroller from 2001 to 2004 and now a partner and vice president at Booz Allen Hamilton. "You've got this fundamental dichotomy that the department has never really been able to resolve for itself." It was Kennedy Administration Defense Secretary Robert McNamara, a former Ford Motor Co. president, who first envisioned the Office of the Secretary of Defense as a corporation, with the military services and agencies as its profit centers, notes Zakheim. The services, meanwhile, tend to see themselves as independent corporations, with the OSD as their holding company.
The chief goal of all the financial-management initiatives has been not just a clean audit, but some transparency at this huge bureaucracy. Prior reforms all died on the vine because they couldn't dent the impregnable walls the military services and agencies have built up around their processes, procedures, and chains of command.
Congress is also at fault. In the main, senators and representatives want to overhaul DoD systems for the national good only so long as the change doesn't interfere with their ability to steer contract-spending to constituents. Real reform would profoundly disrupt that time-honored tradition. Financial-management reforms have also failed because, despite the big talk at their inception, turnover in senior positions has meant inconsistent leadership.
Although some of the previous efforts probably "have resulted in some marginal improvements," says Greg Kutz, the GAO's director of financial management and assurance, "they certainly haven't transformed the way the department does business." Their value, he adds, has amounted to far less than the billions of dollars that have been spent on them.
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