Finances in need of 'radical' fix

The Defense Department needs a "radical financial management transformation" if it is to improve its beleaguered financial systems. But even if department fixes go as planned, it could take nearly a decade before the Pentagon has auditable records.

Those are the conclusions of a just- released review of DOD's financial management systems that was authorized two months ago by Defense Secretary Donald Rumsfeld. Unlike previous failed attempts to improve DOD's financial problems, there is a new push by Pentagon leaders to make this issue a priority, said Stephen Friedman, retired chairman of Goldman Sachs & Co., who led the team that published the report.

"I do believe that [DOD leaders] accord this very substantial weight because they know you can't run an enterprise of this complexity without immeasurably better financial information than you [currently] have," Friedman said at a July 10 Pentagon briefing.

An illustration of the lack of clear and reliable data is that DOD cannot even estimate the cost of fixing its systems, according to Friedman.

"This looks in many ways like a conglomerate [of] the 1970s—competition forced those companies to integrate their financial systems. Pressures of a different sort will force it here."

But large, complex companies have dramatically improved efficiency and saved large amounts of money by "leveraging technology, streamlining processes and integrating very sophisticated logistical and personnel support systems with their financial systems," Friedman added. "This is doable. It will take time."

The report details well-documented financial problems. But it also makes recommendations for fixes. In an effort to maintain focus, the group recommends a two-tiered approach that would emphasize both short- and long-term solutions.

Under the first part, DOD would employ a coordinated, departmentwide management approach to developing standard integrated systems. The second part, which the report calls "close-in success," would target a number of intraservice and cross-service projects that are designed to provide short-term successes.

"This is a long-term effort," said Nelson Toye, DOD's deputy chief financial officer. "You're not going to see significant progress in making financial management transparent in the near term."

Immediately, DOD needs an overall architecture for its financial management systems, Friedman's team said.

The department currently has a financial management improvement plan. But that plan, while a good start, is not adequate, said William Phillips, a partner at PricewaterhouseCoopers, which consulted with the group.

"It's not complete; it's not consistent between the services," he said, adding that the effort will take nine months.

DOD also needs to enforce standards for its core accounting systems across the organizations. "Standardize, standardize, standardize," Friedman stressed.

The existing structure largely consists of outdated, stovepiped feeder systems that transmit data to DOD's core accounting systems. But because there have been no standards, DOD has been forced to develop software that translates the data into the core system. And—much like the childhood game of telephone—the data becomes distorted the farther it goes down the chain.

"When you get up to real-life situations with several hundred data fields...and the systems are not built to talk seamlessly together, someone is going to be doing a lot of manual re-entry," Friedman said. "You can't re-enter 200 things without just guaranteeing dramatically increased error rates."