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Improving DoD's Financial Management
Prepared statement of John J. Hamre, undersecretary of defense (comptroller), the Subcommittee on Readiness, Senate Armed Services Committee, Tuesday, May 16, 1995

Mr. Chairman, members of the committee. I am delighted to be here to assist your examination of efforts by the Department of Defense to improve its financial management.

The Department of Defense is in the midst of the most comprehensive reform of financial management systems and practices in its history. These reform efforts are driven by two pressing needs: first, the need to overcome decades-old problems in financial management systems and procedures; and second, the need to lower administrative costs by fundamentally redesigning the department's fiscal operations.

It is important to understand the context in which our financial reforms are happening. In particular, one needs to appreciate the huge magnitude of DoD's financial operations. Each month on average the department processes about 10 million payroll checks, 12 million contract payments, nearly 1 million travel vouchers and 8,500 court orders requiring garnishment of pay checks. This is business that must get done, even as we seek to transform the processes and organizations that must do the work.

As I describe our successful reforms over the past four years, please remember that we implemented dramatic changes at the same time as we kept pay and contract payments flowing. And when critics assert that DoD should be making more radical changes more quickly, they should be reminded that our department cannot shut down its financial operations while we redesign them.

Before DoD financial reforms began in 1990, the problems seemed intractable. The department's financial management troubles reflected an antiquated bureaucratic organizational structure coping unsuccessfully with the complexities of modern government and business. During the past 50 years, the military services and other DoD organizations developed their own operating procedures and systems. In 1990, DoD had some 250 finance and accounting systems, most incompatible with each other.

As the missions undertaken by the department became more complicated, DoD organizations were forced to interact with each other, revealing a lack of DoD-wide standards for data and procedures, among other things. Rather than redesigning its organization or standardizing its financial management systems, the department developed ever more complicated business practices, which attempted to preserve the individual bureaucratic organizations while coping with more demanding operating requirements.

During the past year, the department has refined and advanced its blueprint to eliminate its long-standing financial management problems. Some of the elements of the reform blueprint predate this administration, while many are relatively new. What follows are highlights of our efforts aimed at totally reengineering DoD financial management.

Defense Finance and Accounting Service consolidation of financial operations. The establishment of the Defense Finance and Accounting Service in 1991 was a giant step forward for the streamlining of DoD financial organizations and systems. Now DFAS plays a pivotal role for key financial management reforms. Of special importance, DFAS is moving rapidly to consolidate over 300 DoD financial installation offices into our carefully selected 26 sites: the five existing large DFAS centers and 21 new operating locations. Some installation offices have already closed, and others will follow soon as their operations are transferred to the DFAS centers and new OPLOCs.

I am very proud of the speed and skill with which DFAS has undertaken this consolidation effort. Begun in 1994, consolidation will have closed 42 financial activities by the end of this fiscal year. Within the next five to seven years, all DoD financial and accounting activities will be operating from only 26 sites.

Consolidation of finance and accounting systems. In tandem with the consolidation of operations is the larger challenge of consolidating and standardizing DoD's many finance and accounting systems. This effort is well under way. To that end, DoD's Corporate Information Management Steering Committee evaluated and subsequently approved five finance systems for which development is already completed or well along. Each is categorized as a DoD migratory system and is being implemented throughout the department.

The five systems are:

 

  • Defense Debt Management System. DDMS standardizes the collection of debts of former military service members and others and became operational in December 1993.
  • Defense Retiree and Annuitant Pay System. DRAS is DoD's standard retired and annuitant pay system and has been fully implemented.
  • Defense Civilian Payroll System. DCPS is a fully automated civilian payroll and leave accounting system. It eliminates the duplication and inefficiencies in the 18 payroll systems it replaces and will be used for all DoD civilians. DCPS will enable us to reduce 360 payroll offices to just four. It will be fully operational by March 1997.
  • Defense Joint Military Pay System. In 1991, DoD had 18 separate military payroll systems; when DJMS is fully implemented by January 1997, we will be down to two. This consolidation will enable us to standardize military pay operations, reduce long-range costs, enhance customer service, and improve pay-service capabilities during emergencies and wartime.
  • Defense Transportation Payment System. When fully implemented by FY [fiscal year] 1996, DTRS will consolidate and standardize DoD transportation payments, e.g., for household goods and freight shipments.
Through the consolidation and standardization of its financial systems and operations, DFAS will achieve significant savings. Once these state-of-the-art technology systems are fully implemented, we will improve productivity substantially and reduce our operating costs -- by over $57 million in FY 1997, for example.

Consolidation of accounting systems. With accounting systems standardization we are having to overcome greater obstacles than with payment systems. Most of the department's 163 major accounting systems were designed to meet only the unique requirements of their users. And again, these systems must continue to operate while consolidation takes place. Nonetheless, the department is committed to, and has undertaken, a major effort to reform its accounting systems.

For Defense Business Operations Fund systems, we have a phased program to reduce the 80 current systems down to a few highly capable ones. Upon completion of economic analyses on the most promising of the existing systems, investment decisions will be made on improvements to these systems and on their deployment to replace less-capable current systems.

In the area of general accounting, DFAS centers and their components have already identified interim migratory systems. As these become operational, DFAS will be able to improve markedly its accountability and reporting capabilities, and save resources by using fewer systems and consolidating its accounting operations. These migratory systems will incorporate a standard general ledger and standard budget and accounting classification codes. We also will ensure that our upgraded systems interface and link to support systems -- such as those for logistics, procurement and contracting.

Standardization.

DoD is taking standardization one step further with its planned standardization of data, definitions and concepts. This is a critical element in our long-term plan to consolidate our FM [financial management] systems, and maximize compatibility between financial management and nonfinancial management systems. Standard data elements also pave the way for needed business process improvements.

For years, DoD's 250-plus finance and accounting systems have been managing thousands of different data elements. Many of these data items are duplicative or redundant in nature, thus impeding our ability to field the most effective and efficient systems in support of our business practices. Detailed data modeling of 80 percent of the financial management business areas has shown that DoD financial operations could be conducted with fewer than 1,000 carefully designed standard data elements.

Because of our focus on future requirements, our modeling efforts have focused on resolving historical deficiencies in current processes. The resulting data elements and business process improvements will be used in future department efforts to streamline and improve our financial processes.

As DoD reduces the number of its financial systems and moves towards the sharing of data under an open systems environment, the importance of data standardization cannot be overemphasized. Data standardization facilitates long-term DoD improvements in the management of data across organizational lines by treating data as a shared commodity separate from programs and applications.

Re-engineering DoD business practices. Another key reform is re-engineering DoD business practices -- to make them simpler, more efficient and less prone to errors. One major focus is on the interaction between financial and nonfinancial systems -- for example, between procurement actions that generate contract payments and the financial systems that make and account for such payments. Improving this process also will support DoD's efforts to reform its acquisition system, streamline infrastructure and save money.

A key example of our effort is the travel re-engineering initiative. Our plans call for us to streamline regulatory guidelines by 90 percent and eliminate the numerous steps currently required to initiate travel, process a voucher and receive payment.

We also are applying electronic commerce/electronic data interface technology to reduce processing time and paper flow by establishing processes for the paperless exchange of information. This technology will be used in our contract pay, vendor pay, disbursing and accounting systems. In a related application, we have substantially increased the mandatory use of electronic funds transfers.

Eliminating/preventing problem disbursements. One of DoD's most vexing challenges has been the repeated occurrence of unmatched disbursements and related problems. We have moved aggressively to correct these problems though various measures. In the past, DoD had routinely disbursed funds in excess of available balances, under the assumption that these accounts were in the red because of administrative accounting errors. Effective last March, I directed an end to this practice. Current DoD policy is to stop payments from these accounts until the deficit condition is corrected.

We also have implemented the requirement to reconcile, research and resolve problem disbursements within 180 days of discovery. If the condition is not corrected within that time, the requirement is to fund (obligate funds/reduce unobligated balances for) those disbursements.

To prevent problem disbursements, we are requiring the validation of proposed payments with the corresponding obligation data in official accounting systems prior to making payments. Beginning in July 1995, DoD will require such validations for all payments over $5 million. In October 1995, that threshold will drop to include all payments over $1 million, and we are developing plans to expand this validation requirement to cover all payments. We also have taken action to solve a related, but separate problem with what accountants call negative unliquidated obligations.

As we moved to correct and prevent these difficulties, I faced a decision about what to do about problem disbursements which were so old that the records needed to resolve them had been destroyed or that could be resolved only with a substantial commitment of workers and money -- and even then, with only limited likelihood of success. Rather than focus an inordinate amount of resources on efforts that are unlikely to permit the department to match disbursements to obligations, I decided to suspend, on a one-time basis, the requirement to research old transactions that meet certain specific criteria.

I made this decision after fully consulting with the DoD inspector general and general counsel. We all reached the same conclusion: The department should not spend enormous sums and countless work-years on a problem that could never be satisfactorily resolved. Those resources would be better applied to fixing the underlying financial system flaws that created the problem in the first place.

Several comments about my decision:

  • First, I made special efforts to inform this and our other oversight committees of my decision so that it would not appear that we were trying to hide a controversial action.
  • Second, DoD will not gain a penny from this decision. I suspended further research only in accounts that are canceled or expired; the remaining balances in those accounts are no longer available to DoD for new obligations.
  • No exception has been provided to the requirement to fund negative unliquidated obligations or unmatched disbursements that are not eliminated by being properly matched to the correct obligation.

Standardization of policies.

In addition to resolving problems, DoD is consolidating and standardizing its financial management policy and procedures. Over 70,000 pages of regulations in 360 publications are being condensed into a single 15-volume DoD financial management regulation. To date, we have issued nine volumes in hard copy, and three of those volumes are available on CD-ROM.

Of special note, Volume 11B of the regulation contains all policies and procedures for DBOF [Defense Business Operations Fund]. Adherence to this new guidance is expected to increase significantly both the accuracy and usefulness of DBOF financial information, pending the implementation of improved automated systems.

The structure and content of our new financial management regulation is intended to preclude the need for supplementary implementing procedures by the DoD components, and additional supplemental implementing instructions are explicitly precluded. This approach is intended to ensure standard implementation of policy by precluding DoD components from continuing the practice of interpreting and implementing policies and procedures in a nonstandard manner.

DoD's financial management reform blueprint constitutes an ambitious agenda, and the department's leadership is determined to carry it out vigorously. Our goal is a reliable, streamlined financial management system -- with the minimum of unnecessary duplication and wasteful procedures. I am very proud of the pace of our progress so far, and seek your support so that it can continue as expeditiously as possible.

Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant to the Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html.