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fist as another staly erent adex Se Defense Scene Board took a look at how many mombat-ended positions then n in the military. At that time they looked at my perent if the wa wordine = DCD wis cat-ended posters. The meats she or of people are somcat-coded postcns. The res are one form fire merhead et cetera.

I don't think the aste a sining hans ver whether is persent Bill Owens world pricati saya beer in 10 persent Someone else mights pick a nicer of 57 perment. Any waT FOG DR at in because of the reconcances you met the milestos. the tering of the structure so many tens of supervision that have pre faced his secting any fine iter backed up by fve the people any way you look at -ices: matter whether you pick the docer 2 pertecs - 3 ayng as for reform And although I am not a Senator. I think you have tw jocs here for the price of one. You have got to set a budget for next year. But I think alst you have the very important opportunity to set a trajectory and a way of looking at things for many years to the future.

We in my sonice have a termic set of very experienced avbhan Secretaries. Because of the Tail and Tooth Commisscn. I met every the of them and their Deputies. They have the experience. They have the ability. I think what they need is the directional encour agement to do what they know has to be done, tackle that tail and start making changes.

Just to give you one other frame of reference, during the Viet nam period, it was estimated the tail-to-tooth rano was 50 50. The difference between 50 50 and 70 30 would make available for teeth and other purposeful things $50 to $60 billion that is being used in overhead. It is just there if the determination is set at the senior capable civilian levels in the Pentagon to go after it while you are fighting the war instead of letting the war become an excuse to let all this other stuff stay.

I think the budget as submitted to you was business as usual. I would hope that this committee and the other relevant committees in the Senate decide that it is not the right time to just go business as usual.

Chairman CONRAD. Dr. Thompson, what part of that analysis would you disagree with in terms of this tooth-to-tail concept?

Mr. THOMPSON. Mr. Chairman. I think it is not so much what I heard that I disagree with as I would like to make a comment about what was left out. I spend a lot of time dealing with senior military officers, and they will tell you that, yes, they are wasting money. But then they will go on to tell you most of the reason they are wasting money is because of things that have been mandated by Congress.

A senior Air Force officer told me two days ago that he doesn't need 25 percent of his bases, but he doesn't believe he can close them going through the congressional process. I participated in two Defense Science Board task forces in the early 1990s, one of depot maintenance, one on privatization. We expressed many of the same ideas that Mr. Weston has expressed. For the most part, they have

gone nowhere, and the reason why is because each one of these activities represents large concentrations of votes, in some cases enough votes so that you could argue it would affect the outcome of congressional elections.

You need only ask yourself the question, if Eglin Air Force Base were not in Florida, who would be in the White House today, to see the significance, the electoral significance of some of these issues. Chairman CONRAD. Could I stop you right there and ask youI don't want to miss the point. Depot maintenance, you referenced that and you apparently-what is your estimate of the surplus capacity in depots around the country?

Mr. THOMPSON. That is a very complex calculation. The Department of Defense spends more money on equipment maintenance than the entire NASA budget, the entire space program, about $15 billion a year. The most intensive amount of that work, the one that is done for the most part by civilian Federal workers, is done in a handful of very large logistics facilities such as Warner Robbins Air Logistics and Portsmouth Naval Ship Base.

You could close several of those facilities. More importantly, you could substantially downsize and outsource the work at those facilities, probably saving at least $1 billion a year if you adopted best practices. But it is not going to happen. It is not going to happen because the congressional resistance would be so fierce that in the end you would wish you had never tried.

Chairman CONRAD. Okay. Dr. O'Hanlon, what is your observation on this tooth-to-tail question?

Mr. O'HANLON. It is a tough question, Senator, because, of course, most of our tail is very important to the military. And if you look at our military compared to many other militaries, we have a lot more tail, and we are also a lot better. And if you compare it to the Vietnam era, we are lot better today than we were when the tail was only 50/50. I am not saying the tail is the reason, but I am saying that a lot of what we do in the way of deployable logistics that allows us to put hundreds of thousands of forces into a foreign country and operate there effectively, that can be defined as tail, but it really is inherent to combat capability.

So in the end, even though I agree with my colleagues, I am not that comfortable talking about 30/70 and 70/30 ratios. I like to focus on the big areas of military O&M spending, like Loren just did in the case of maintenance, and say where can we save money. And it seems to me the big areas are health, which is one enormous area, base operations-you know, take base operations. Maybe I will just spend a second there and then stop. Base operations, it is amazing to me, you have a person who is running a base who is also, let's say, a one-star general, and he is a combat expert, but he is also expected to run a base and be the chief financial officer for essentially a small town and for all of its physical plan. I think sometimes we make unrealistic demands on these people, and I am not sure if the services are properly set up to, you know, have the same person-I am not sure it is realistic to have the same person running the wing or running the division and trying to figure out how to make that base efficient. And so to give that person incentives, you need to tell that person some of this savings that you might get from any reforms, you are going to get

back for your combat activity. Then that person has an incentive to hire people to work for him who know how to make the right choices about housing, about base repair and so forth.

So I am concerned not so much about the 30/70 ratio, but about certain specific areas, like health care, base maintenance, O&M, where I think we already spend a great deal of money, and some of these things are really not contributing in a great way to combat capability. But much of the logistics tail is important: intelligence, logistics, transportation. These are things that we do uniquely and uniquely well among the world's military. So I don't want to lose that part of the 70 percent even as we reform the parts that should be reformed.

Chairman CONRAD. Let me just say that I don't think anybody who has seriously looked at the financial management systems of DOD has concluded anything other than they are way, way, far away from business best practices. I don't know how you would manage the Pentagon. And I can tell you, the Secretary is very frustrated. As a man who came out of the corporate world where he insisted on management information that would allow him to save money, eliminate duplication and waste, anybody who has looked at the financial management data that flows through the Department of Defense, it is a huge problem. I think probably anyone would acknowledge that.

Mr. Weston?

Mr. WESTON. Mr. Chairman, if I could piggyback on your last comment with, I think, a useful anecdote, during the Tail to Tooth Commission's research, we were invited by the United Kingdom's military to visit their logistics group. They had started out with a very deficient finance and accounting system, and I realize as I mention the U.K. that no two countries are the same, but I want to share a story with you.

They concluded it was terrible. They brought in two outside consultants. This is not a paid ad. McKenzie was one of them, and Coopers & Librand was the other. And they came up with the specs for what is an appropriate financial control system. They got the specs. They outsourced it. And for $800 million, in their lesser environment, they got a turnkey installation of a system that us private sector guys, when we saw it over there, said was darn good, much better than ours.

The message I give you is that if, as I think is necessary, this committee and your colleagues in the Senate recognize if you don't have a reporting system, you can't hold anybody accountable for anything. You don't even know what is going on. And, therefore, I think it is time to get away from business as usual, budgeting as usual, and insist that the Secretary of Defense, together with knowledgeable colleagues, come up with a plan that will give you a financial control system for the future. Otherwise, for the next 20 years, one year at a time, you will continue to have an inadequate system. And if it takes a few billion dollars up front, that is probably the best investment this Nation can make.

Chairman CONRAD. Senator Stabenow.

Senator STABENOW. Well, thank you, Mr. Chairman, and thank you to all the witnesses. Your information is extremely helpful. I think we have a special responsibility and duty this year to make

tough decisions, to ask tough questions. We heard yesterday regarding the future obligations and unfunded liabilities that we are incurring in the next couple of decades as it relates to our budget. And we have some very tough decisions to make. So we appreciate the information.

I was interested in, Dr. O'Hanlon, your suggestion about essentially putting the current costs for the war into a supplemental. I think there is some merit to that, Mr. Chairman. That would make sense to me. And I was also interested in light of that, when you said in your conclusion that most of the proposed increases have limited relevance to the war on terrorism in the current budget. It seems to me it would help us be able to debate the issue if we were looking at what was needed currently for safety and security and the war and then the long-term implications of the rest of the request.

Mr. Weston, I wondered if you might expand a little more. It is very disturbing, even knowing that obviously we need those who are not directly in combat to support those who are. That makes perfect sense, whether it is intelligence, whether it is other individuals that are involved in the logistical end of the strategies and combat and so on. But I think it is safe to say that the average American would be very disturbed to know that seven out of ten people or seven out of ten dollars does not go directly into the fighting force to keep us safe and secure. And I think about our schools, and what if we were to say that only three out of seven-or three out of ten of the staff were actually working with the children, or in the health care area only three out of ten were actually treating patients? So I think this is an area of concern to me, and I wondered if you might give us an example to illustrate and speak a little bit more about the tail that you would believe is, in fact, not directly related, as Dr. O'Hanlon said, to the support of our combat readiness, our combat troops, but what you would view as excess tail.

Mr. WESTON. Let me give you several examples in no order of priority. Generally, the military builds and maintains its own housing, knows very little about building housing, knows an equally small amount about maintaining housing; and if you spoke to the people who occupy that housing, you would hear huge dissatisfaction. Our point of view at the Tail-to-Tooth Commission was that if ever there were an area where this Nation has extremely skilled entrepreneurs, it is in building and maintaining housing. We do that all over the country.

I will not amplify further, but that is just one example. Senator STABENOW. Excuse me, Mr. Weston. So you are suggesting essentially a privatization of that function, or—

Mr. WESTON. Absolutely. Outsource the building, the maintenance, the operations, everything about housing. A house is a house is a house. In fact, if you were in the private sector, you would never make a row of tenements called military housing; you would want to make it feel like a community. Any private sector developer knows that. You take a look at military housing-it is just a bunch of rowhouses.

It is not anybody's fault, but the military does not have that talent. It does not add to our fighting effectiveness. It is absolute "tail," poorly run.

Let us take something else. There are many functions that are business functions in the military that I previously called "yellow pages," meaning that you can go into the classified section of a phone book and find somebody-find a lot of somebodies-who does "x". What I am going to say now is not a commercial. ADP is not interested in doing any payrolls for the military. However, the military with its three payrolls-it has made some progress latelyviewed them as being so unusual that only they could do them in the Defense Finance and Accounting Service. Outsourcing those payrolls and I am not looking for them at ADP; I would reject them if they came our way, just so that I would not pick up a stigma-it is another example.

There is another aspect. We heard words about logistics, replenishment, acquisition. In the private sector, as every one of our very skilled service secretaries knows from their private experience, before you get to procurement, you are at a pre-acquisition phase, and you look for full life-cycle support if you can arrange it, instead of having your own depots and your own parts as a military. I would think that the whole area of buying and maintaining logistics and repair support on complex hardware could benefit a lot if you used the commercial practice, worked with the potential vendors pre-acquisition, set specs that require full life-cycle maintenance, do not have those depots, do not have stacks of obsolete inventory all over the place and you would not have the 18-day average_replenishment cycle the military has to get a replacement part. The private sector would not stand still for 18 days; they get it in 3. That whole thing has to be reviewed. There are probably 100,000 people involved in the acquisition phase at the Pentagon. They are all sincere, well-meaning people. But I am positive that Secretary Rumsfeld knows how to do that procurement better. I think he needs the encouragement and the priority to get on with it. And then, the Secretaries have to stay in office longer than the current average of 19 months. There is no major job, including Jack Welsh's-in his first 19 months at GE, he did not produce the results; he was setting the stage.

I have been told that at the Pentagon, the average term in office of the senior civilians looking backward has been 19 months. Now, you cannot mandate a change, but that is a part of the circumstance.

Senator STABENOW. Thank you.

Would either of our two other guests wish to comment in relation to those items, or do you have differences of approach?

Dr. Thompson?

Mr. THOMPSON. I would like to comment briefly.

Since Mr. Perry was Secretary of Defense, we have been moving increasingly toward the privatization of housing. If you look at the presentation of the defense budget on OMB's website for 2003, you will see a fairly extensive amount of housing privatization already underway.

As far as the depots are concerned, I think we have to recognize that managing the Pentagon is as much of a political process as a