Chapter 11

FINANCIAL MANAGEMENT REFORM

During the last three years, improvement of the Department's financial management (FM) has been a top priority. Early on, DoD leaders concluded that the Department's FM deficiencies were more fundamental and entrenched than previously recognized. The remedy has been the most comprehensive reform of FM systems and practices in DoD history. Progress has been substantial, but more work still lies ahead.

The Department's FM reforms aim to streamline and redesign DoD financial processes and organizations in order to make them optimally effective and to cut costs. Reforms also seek to ensure that DoD financial management fulfills the needs of its leaders, meets statutory requirements, maximizes efficiency, minimizes fraud, and provides superior customer service.

PROBLEMS AND CAUSES

Since its formation in 1947, the Department of Defense has had a decentralized mode of operations. A benefit of that has been high effectiveness and initiative within the Services and the other organizational components of the Department. Until recent reforms, however, a drawback has been that these DoD components managed their own budget, finance, and accounting systems. As a result, they developed their own processes and business practices, geared to their particular mission and with little need to achieve compatibility with other DoD operations. As defense missions became more complicated and DoD organizations were required to interact more with each other, systems incompatibility and lack of standardization took a toll. Rather than redesigning its organization or standardizing its multitude of systems, the Department developed increasingly complex business practices to link its systems.

Such complexity left DoD financial systems prone to error or to demands that could not be met with the systems, personnel, or time available. No matter how good the people operating the systems, problems were inevitable. Moreover, there was an inherent inefficiency in having scores of incompatible organizations performing virtually identical functions. For example, there was only one pay schedule for military people and one for DoD civilians, yet the Department maintained dozens of different pay systems. This chapter highlights reforms to solve these and other DoD financial management problems.

REFORM INITIATIVES AND CONSOLIDATIONS

Defense Finance and Accounting Service and the Consolidation of Financial Management Operations

Since its activation in January 1991, Defense Finance and Accounting Service (DFAS) has been the Department's pivotal agent for financial management reform and consolidation. DFAS now processes a monthly average of 9,800,000 payments to DoD personnel; 830,000 commercial invoices; 730,000 travel vouchers/settlements; 550,000 savings bond issuances; and 200,000 transportation bills of lading. Total monthly disbursements average $25 billion. Through its various initiatives, DFAS has made savings in operating costs that will total $1 billion by the end of FY 1997.

There are two types of DoD FM systems. Finance systems process payments to DoD personnel, private contractors, and the like. Accounting systems record, accumulate, report, and analyze financial activity, including revenues and other receipts. Before DFAS was established, the Department had 291 of these finance and accounting systems.

Until consolidation began, the Department's many financial systems operated from about 330 field activities or sites. By November 1998, DFAS will have reduced these to five DFAS Centers and no more than 21 operating locations. As of January 1997, 70 percent of the consolidation is complete. This site reduction, along with the consolidation of finance systems, will carry many benefits. It will eliminate redundancy and unnecessary management layers, facilitate standardization, improve and speed up operations and service to customers, increase productivity, facilitate expanded use of innovative technology, and enhance the FM support of DoD decision makers.

In addition to revamping internal systems and practices, the Department is reaching beyond its organizational confines to find the best way of doing business. For example, DFAS has initiated DoD versus private sector cost comparisons in the functional areas of logistics and administrative support of its facilities and vendor pay in support of the Defense Commissary Agency. The objective is to determine how best to provide the most cost-effective financial services. For some functions, that may mean contracting out to the private sector. For example, in two business areas, printing/publications and base support for the Navy, the Department plans to enhance operations using commercial accounting systems.

Consolidation of Finance Systems

As reform is carried out, existing finance and accounting operations must continue to operate. People must be paid and accounts kept current. Because of these and other considerations, the consolidation of financial systems is being carried out in stages. The first step is to designate certain existing systems as migratory systems, into which all similar systems can be consolidated without serious difficulty. In preparing these designated systems for their expanded role, the Department adapts the best features of existing systems, corrects reasonably correctable deficiencies, improves processing and reporting capabilities as much as possible, and seeks cost savings.

The next step is to develop optimum follow-on systems, drawing on lessons from the migratory systems and taking full advantage of the latest technology. The transition to these optimum systems then proceeds at a pace determined by the resources and technologies available to facilitate transition and other circumstances.

The consolidation of DoD finance systems is nearly complete. By the end of FY 1997, the number of DoD finance systems will be reduced to 38 from the 1991 baseline of 94. The resulting annual savings will be $98 million. The long-term goal is to cut the number of DoD finance systems to only eight.

Consolidation of DoD's finance systems consists of the following:

• As of September 30, 1996, 622,000 civilian payroll accounts have been transferred to the Defense Civilian Pay System (DCPS). This represents an elimination of 17 legacy systems and the closing of 324 decentralized payroll offices. By mid-1998, DCPS will be fully implemented with all employees paid on one system from just four locations. This has been the largest and most complicated payroll conversion in history.

• In 1991, all military members were paid on one of 22 separate military pay systems. Today there are only three military pay systems and 78 percent of military members are being paid by the Defense Joint Military Pay System (DJMS) and the Marine Corps Total Force System (MCTFS). By the end of FY 1999, DJMS will be fully implemented and all service members will be paid by either DJMS or MCTFS, eliminating 20 pay systems and the payroll processing function at 62 locations.
• The Defense Transportation Payment System (DTRS) successfully launched a completely paperless processing capability for freight transportation bills using Electronic Commerce/Electronic Data Interchange (EC/EDI) American National Standards Institute approved standards. This system is now used by a small fraction of total invoices but growth has been steady. In the first quarter of FY 1997, system functionality will expand to process personal property bills. DTRS standardization and consolidation of all DoD transportation payments at a single location will be completed during the fourth quarter of FY 1997.
• The Defense Retiree and Annuitant System was fully implemented in FY 1995 and now manages over two million accounts. When DFAS was created, retirees and annuitants were being paid through eight systems handling fewer than 2,500 retired pay accounts per employee. DoD now has one system, handling 3,400 accounts per employee.
• The Defense Debt Management System became operational in 1993. It standardizes the collection of debts from military and civilian personnel not on DFAS active payroll systems, as well as delinquent contractor payments. It replaced five distinct systems operated by DoD components.
• All DoD contract payments currently are made from an effective system called the Mechanization of Contract Administration System (MOCAS). However, vendor payments are made from nine different systems. Projects are underway to develop a single standard procurement payment system to replace these nine systems, as well as MOCAS. The goal is a system that will utilize advanced technology and a standard data warehouse that would be shared with the acquisition and procurement communities. Similarly, a standard disbursement system will be selected and improved to replace the current seven systems.

Consolidation of Accounting Systems

The Department is continuing its consolidation from 103 general fund and other departmental accounting systems in use in 1991 to 63 systems to the end of FY 1997 and ultimately to no more than nine systems. Simultaneously, DoD is improving these systems to make them compliant with generally accepted accounting principles and auditable information as required by the Chief Financial Officers Act of 1990. The target DoD accounting systems will be capable of providing accurate, timely, and auditable information. The Department is also working to improve significantly the link between accounting systems and the nonfinancial systems that handle logistics, procurement, and contracting. For the DoD Working Capital Funds (formerly the components of the Defense Business Operations Fund or DBOF), the target is to reduce from the 94 systems that existed in 1991 to 57 systems at the end of FY 1997 and ultimately to no more than 15 systems. As an added benefit, the consolidation of finance and accounting systems will reduce DoD costs for fixing its year 2000 software problem, a challenge now vexing nearly all computer users in both the private and public sectors.

STRENGTHENING INTERNAL CONTROLS

Eliminating Problem Disbursements

Problem disbursements in DoD financial operations occur when an expenditure has not been reconciled with official accounting records. Such occurrences are the result of a decades-old practice that allowed payments to be made after validation of the receipt of the related goods and services, but before ensuring there was a clear path back to the appropriate accounting entry. This practice is being phased out as quickly as possible, and DoD has been working hard to resolve problem disbursements that have accumulated because of it.

DoD has made substantial progress in reducing the two basic types of problem disbursements:

• Disbursements that have not been matched to an obligation (unmatched disbursements).
• Disbursements that exceed the obligations to which they have been matched (negative unliquidated obligations).

In June 1993, when DFAS began intense efforts to solve this situation, the Department had a total of $34.3 billion in problem disbursements. By December 1996, the problem disbursements had been reduced to $8.6 billion using the same scoring methodology.

In addition, DoD has an extensive Business Process Reengineering effort underway to improve its disbursement process so as to minimize in-transit disbursements.

While DoD's problem disbursements have been a serious issue needing remedy, there is no basis for concluding that the expenditures involved were wasted. Each expenditure was made only after a Department official confirmed receipt of the subject goods or services and ensured that the payment was made in accordance with a valid contract. The Department has extensive procedures to safeguard that process. The failure was not having these valid and proper disbursements reconciled with accounting records in a timely manner.

To prevent future problems with disbursements, the Department is working toward requiring that every disbursement be prevalidated, that is, be matched to an obligation before payment is made. Since July 1996 for contracts centrally administered by the Defense Contract Management Command, the prevalidation threshold has been lowered to $4 million for payments by DFAS's Columbus Center. Prevalidation at the other DFAS centers is tied to a $1 million threshold, but many payments below that level are prevalidated as well. In addition, at the DFAS Columbus Center, all payments are now prevalidated to zero for new, centrally administered contracts awarded after September 1996. This total prevalidation excludes calls and orders against contracts awarded prior to October 1996.

In addition, the Department has multiple initiatives in process to further eliminate problem disbursements, specifically:

• Gradually lower the prevalidation threshold to zero for all payments.
• Provide disbursement voucher information to the DoD Internet for access and recording by accounting stations.
• Pilot testing the matching of payments and accounting data using a data warehouse.

During the next year, the Department expects these initiatives to allow a steady reduction in the thresholds on existing contracts, with the ultimate goal of prevalidating all disbursements.

Overpayments to DoD contractors constitute another area receiving intense management attention. Table 7 shows DoD's dramatic reductions to the scope of the problem. While contractor overpayments must not and will not be tolerated, it is important to put them in proper perspective. DFAS's Columbus Center processes contractor payments totaling $90 billion annually, or about $35 million in disbursements per hour. Of this total, contractor overpayments amount to about 0.3 of 1 percent. In other words, DoD is about 99.7 percent accurate. Major initiatives are well underway to further improve this area by the end of FY 1997.

Table 7 Contract Overpayments (Dollars in Millions
1993	1994	1995	1996
$592	$293	$244	$184

Funds Distribution and Internal Controls

Funds within the Department traditionally have been distributed and controlled in various ways, using either manual or automated systems, or a mixture of the two. This situation has made department-wide control of funds very difficult. To improve control, the Department has begun to utilize the Program Budget Accounting System (PBAS) to standardize the distribution of funds. PBAS, previously used only in the Army, is now used for the defense agencies, and similar improvements are being made in other systems for the remaining Services.

The Department has taken bold action to ensure the accuracy and timeliness of its financial transactions and to prevent Antideficiency Act violations. There is a new requirement for more frequent and complete reviews of commitments and obligations of funds. The Department has undertaken major efforts to ensure compliance with the Federal Managers Financial Integrity Act, and DoD components have strengthened their internal financial controls. There also is increased emphasis on training to foster strong FM and to prevent problems like antideficiency violations.

A major problem preventing the Department from certifying its financial statements has been a lack of accurate accounting for capital assets, including real property. To solve this, DoD leaders developed the Defense Property Accountability System to support and enable proper accountability of all capital assets at DoD installations. With all DoD property controlled in a single system, the Department can eliminate the need for the 150 property systems previously in existence.

Reforming the Contractor Payment Process

For the past 30 years, all cost vouchers for goods and services purchased on government contracts had to be submitted to government contracting officers or the Defense Contract Audit Agency (DCAA) for approval before being sent to a government payment office. The interim approval process substantially delayed payments and required extensive effort by DCAA, government contracting officers, and contractors themselves. The process involved more than 100 different DCAA field audit offices and 4,000 contractors and approval of 350,000 vouchers annually.

DCAA has now implemented a program that allows direct submission of cost vouchers to DFAS by contractors who maintain adequate policies and procedures for the preparation of such vouchers. DCAA continues to provide oversight by periodic review of contractors' preparation of vouchers and by examining a sampling of paid vouchers.

About 80 percent of government contractors are expected to be eligible eventually for the direct submission program. This will result in a significant savings of auditor time, without putting accountability at risk. The program also facilitates the transmission of contractor voucher payments using Electronic Data Interchange, another source of savings and efficiency.

Computer Security and Fraud Detection

In June 1994, the Department established Operation Mongoose to detect fraud and reduce the vulnerability of its computer networks to intrusion. For example, to identify potentially fraudulent payments to individuals or contractors, data matches can be made from multiple sources -- most notably from the civilian, military, retired and annuitant, vendor, and transportation pay systems. While Operation Mongoose is designed to detect potential cases of fraud or abuse in the tens of millions of financial transactions undertaken every year, it also has a more important agenda -- to reduce financial system vulnerabilities to intrusions, identify potential weaknesses in internal controls, and make it harder for would-be culprits to abuse payment systems.

Last year, Operation Mongoose was the catalyst for a government-wide conference that focused on using computers to detect and prevent fraud against a wide variety of government programs. Efforts are now underway to develop vehicles for advancing this crucial work.

REENGINEERING BUSINESS PRACTICES

A critical aspect of the Department's financial management reform is the reengineering of its business practices, which are the procedures by which management and administrative systems function. The goal is to make DoD business practices simpler, more efficient, and less prone to error. Reengineering is being achieved by the revision of existing policies and procedures and the increased standardization, consolidation, and compatibility of existing systems.

DFAS is achieving a significant reengineering of the associated financial operations business practices. Its streamlining of systems and locations is central to DoD efforts to facilitate standardization, improve accountability, reduce data incompatibility, and improve customer service.

Improving Exchange of Financial Information

DFAS is using a number of reengineering technology initiatives to promote the paperless exchange of financial information:

• Electronic Funds Transfer (EFT) is reducing the cost of disbursements. Over 91 percent of DoD civilian employees and military members paid by DFAS have their pay directly deposited into their accounts. The Direct Deposit participation rate for travel payments has increased from 17 to 48 percent. In 1996, 57 percent of the DFAS major contract payments were by EFT. This accounted for 81 percent ($54 billion) of total contract dollars disbursed. This percentage is expected to increase with DoD implementation of the Debt Collection Improvement Act of 1996.
• The use of EDI or computer-to-computer exchange of business transaction information in accounting and vendor pay systems is streamlining DoD business processes and reducing data errors and transaction costs. DFAS, working with the business community, received approximately 800,000 EDI vendor invoices in FY 1996. This initiative will be further expanded in the next year.
• The use of EDI to process DoD transportation freight payments is increasing. The percentage of government bills of lading issued by the DoD transportation community using EDI grew from 10 percent in FY 1995 to 65 percent in FY 1996. Currently, 20 percent of the Department's freight invoices are now received by EDI from private industry. When the requester, shipper, carrier, DFAS, and General Services Administration use EDI, costly manual audits are eliminated.
• The DFAS Major Contract Payment System received 10 percent of progress payments and commercial invoices in FY 1996 and will reach a 40 percent volume level for all such transactions in FY 1997. DFAS is currently working to receive and process contracts, contract modifications, and receiving reports into the finance and accounting systems via EDI transactions. DFAS is sending EDI remittance information directly to vendors.
• Electronic Document Management (EDM) is designed to provide users with on-line access to financial documents and information, advance the application of new methods and technologies, ensure the consistent implementation of business practices, improve the delivery of customer service, and reduce operating costs. EDM involves the collective application of three technologies, imaging, electronic foldering, and workflow. The current focus of the EDM program at the DFAS Centers and Operating Locations is on bill paying. EDM is currently being tested and installed at the DFAS Columbus Center and the Omaha Operating Location, with deployment to all DFAS operating locations in the near future.
• Electronic Document Access is a major element within EDM which uses the Internet and World Wide Web technology as a means of sharing documents across the Department. DFAS has partnered with the Navy acquisition community, the Defense Information Systems Agency, and the Defense Printing Service to develop an intranet application that provides DoD-wide on-line access to contracts and other documents stored at remote locations. The primary advantage of the EDM approach is to produce enterprise-wide solutions to document production and storage without requiring wholesale change to business practices.
• The civilian pay functional area has been reengineered to permit the capture of data at its source. Time and attendance data is recorded by timekeepers located at the employing activities via on-line system entry or by off-line entry into PC based systems. Customer service representatives located at employing activities perform on-line system updates to employee specific data such as home address; Savings Bond data; federal, state, and local tax data; and savings allotments. Entitlement data such as salary, health, and life insurance and Thrift Savings data are received directly from the personnel system via an automated system to system interface.

To improve DoD business practices, DFAS's information systems experts are reengineering software development, thus making improvements in requirements management, project planning and oversight, software configuration, and quality assurance.

Garnishment Operations

DFAS is continuing the reengineering of all processes by which the Department garnishes the pay of its civilian and military personnel for child support, alimony, commercial debt, and divisions of retired pay. Each month, DFAS now processes over 12,000 garnishment orders at a consolidated single location. Previously, it was done at five different locations. Over the next three years, DFAS will implement further improvements. Most notably, DFAS will integrate EDI, imaging, and artificial intelligence into garnishment operations to increase efficiency and cut costs.

Government-Wide Purchase Card Expansion

Another important example of DoD reengineering involves the government-wide purchase card, known as the International Merchant Purchase Authorization Card. Since starting in 1989, the Department's participation in the purchase card program has grown now to include over 72,000 cardholders making purchases totaling nearly $2 billion annually. Although this purchasing constitutes about half of the U.S. government total, DoD leaders believe that use of the purchase card can and should be expanded.

The purchase card streamlines purchase approvals, generates less financial documentation, reduces costs, and speeds up vendor payments. The purchase card enables the Department to use bulk commitments and obligations in accounting for purchases, use summary accounting for groups of purchases instead of detailed lines of accounting for each transaction, and use an accelerated invoice reconciliation process with the purchase card issuer. Finally, its use supports the goals of the National Performance Review and benefits both the government and its vendors.

DFAS processes about 10 million commercial invoices per year, over three-quarters of which are within the $2,500 (micro-purchases) threshold for the purchase card. To get more of these made with the purchase card, two parallel process action teams were formed. The teams made 57 recommendations to improve DoD business practices and increase dramatically the number of cardholders and card purchases.

Many of the initiatives will not only improve business practices, but also ensure savings for DoD. For example, practices such as using an accelerated invoice reconciliation process will enable DFAS to make faster payments, virtually eliminating interest payments due to the Prompt Payment Act. Summary accounting for groups of purchases will reduce the costs, the amount of time, and the size of the workforce needed to process individual items. Customers will also benefit from rebates and lower rates as a result of electronic payments.

Travel Reengineering

Another important reengineering effort is simplifying the process for temporary duty travel by DoD civilian and military personnel. In 1995, the Deputy Secretary of Defense directed sweeping changes in its travel processing based on the recommendations of a DoD-wide task force. In order to implement these recommendations, the first action was to establish a Reengineering Travel Transition Office to formulate policies and procedures for temporary duty travel. In September 1995, a Program Management Office was constituted to design and acquire a new Defense Travel System. The vision of this new system is to develop a seamless, paperless system that meets the needs of travelers, supervisors, and process owners; reduces costs; supports mission requirements; and provides superior customer service. The Department will rely on the private sector for most travel-related services -- except for the obligation and approval of funds, final accounting, and random audit.

Features of the reengineered TDY system include:

• Simple policies and entitlements focused on mission requirements and respectful of the integrity of travelers and commanders.
• A single trip document to serve as travel order, voucher, and itinerary record.
• Maximum use of government travel credit cards to eliminate cash advances.
• Exclusive use of commercial travel offices for all travel arrangements and cost estimates.
• Simplified accounting to enable supervisors to track travel budgets.
• Random and exception-based audits instead of 100 percent audits.

In June 1995, the Department established 27 pilot sites representing the Joint Staff, the Services, and seven defense agencies to test the concept of operations for the new Defense Travel System. Some 50,000 DoD personnel are participating in the tests. Initial results from the pilot sites suggest that processing costs for travel could be cut in half with reform.

Standardization of Data

The standardization of financial management data throughout the Department is crucial to reform. It facilitates the consolidation of financial systems, enables the sharing of data and greater compatibility between financial and nonfinancial systems, and supports the reengineering of business practices. Until recent consolidation efforts began, DoD finance and accounting systems managed 100,000 data elements. Detailed data modeling has indicated that DoD financial operations eventually could be conducted with fewer than 800 carefully designed standard data elements. As of June 1995, the Department has adopted 540 standard data elements; additional elements are likely to be added in the future.

Also supporting reform is an ambitious effort to standardize and share acquisition data. This will greatly improve the interactions between DoD procurement systems and the financial systems that process and account for payments of procurements.

To foster standardization beyond data elements, the Department is consolidating financial policy and procedures into a single 15-volume DoD Financial Management Regulation. Now nearly complete, this effort replaces a myriad of existing regulations and clarifies and expands upon many FM policies and procedures. All volumes are currently available in hard copy format. Six of these volumes are available on CD-ROM and electronically on the DFAS-Cleveland Bulletin Board. All future updates will be distributed on the Internet on the DoD Comptroller's home page. Any hard copy or CD-ROM needed will be obtained on demand from the Defense Printing Service.

Management Incentives

A fundamental aim of DoD reform is to use financial controls more effectively in supporting desirable management incentives. For example, a key goal of the DBOF initiative has been to guide management decisions toward genuine cost consciousness by prescribing that all relevant data be included in the costs affecting those decisions. To encourage greater cost effectiveness, the Department is devising ways to track budget expenditures relative to their associated outcomes, as required by the Chief Financial Officers Act and the Government Performance and Results Act.

CONCLUSION

Financial management in the Department of Defense is a work in progress. There have been notable successes, but progress is slow in some areas. It is impossible to reverse decades-old problems overnight, and some reforms will require several years of transition, experimentation, reengineering, and modernization.

In moving ahead, DoD financial management reform must accommodate two unavoidable constraints. First, the Department cannot stop its financial operations while it fixes outdated business practices and flawed systems. Every day, the Department must manage payrolls, process payments, and produce financial reports. These daily operating requirements impose a strong practical test on all plans for changing systems and business practices.

A second constraint is that lasting reform demands consensus and collaboration. Few solutions rest exclusively within the jurisdiction of the financial management community. Reform of DoD financial management invariably entails changes in the business practices of other defense organizations and functional groups -- like the personnel, acquisition, or logistics communities. This demands an unusual degree of consensus building and collaboration. This slows the pace of change, but there are no viable shortcuts. Pressing ahead without consensus and collaboration will not produce lasting reform.

DoD's leadership is committed to making financial management reform a hallmark of its stewardship. Progress to date has been substantial, and the Department is determined to complete this historically significant challenge.