Outsourcing for commercial services is a growing practice within the government in an attempt to achieve cost savings, management efficiencies, and operating flexibility. Various studies in recent years have highlighted the potential for DOD to achieve significant savings from outsourcing competitions, especially those that involve commercial activities that are currently being performed by military personnel. Most of DOD’s outsourcing competitions, like those of other government agencies, are to be conducted in accordance with policy guidance and implementation procedures provided in the Office of Management and Budget’s (OMB) Circular A-76 and its supplemental handbook. In August 1995, the Deputy Secretary of Defense directed the services to make outsourcing of support activities a priority. The Navy’s initial outsourcing plans for fiscal years 1997 and 1998 indicated that it would conduct A-76 outsourcing competitions involving about 25,500 positions, including about 3,400 military billets. As of February 1998, however, the actual number of military billets announced for A-76 competitions in fiscal years 1997 and 1998 was changed to 2,100. Navy officials told us that when the Navy announces its intention to begin an A-76 study that includes military billets, the funding for those billets is eliminated from the military personnel budget beginning with the year the study is expected to be completed. The Navy’s rationale for eliminating these billets from the budget is that it expects the functions to be either outsourced to the private sector or retained in-house and performed by government civilians. Either way, the functions will be funded through the service’s operations and maintenance budget and not the military personnel budget. According to OMB’s Circular A-76, certain functions should not be outsourced to the private sector. These functions include activities that are closely related to the exercise of national defense and DOD’s war-fighting capability and must be performed by government personnel. DOD guidance designates that one such protected area is billets that are required to support rotational requirements for active duty enlisted military personnel returning from overseas assignments or sea duty. Rotational billets are generally defined as those positions that must remain available to military service members to (1) ensure that those returning from overseas assignments or sea duty have adequate rotation opportunities and (2) provide opportunities for the service members to continue to function within their areas of specialty for purposes of maintaining readiness, training, and required skills. The Navy has identified the minimum number of such rotational billets required for enlisted personnel for each specific skill specialty and grade. Its sea-shore rotation goal is that sufficient shore billets be available for each skill specialty and grade level to provide an equal mix of sea duty and shore duty, that is, 3 years at sea for every 3 years on shore, for its enlisted personnel in grades E-5 through E-9. Because sea billets exceed shore billets, the Vice Chief of Naval Operations established a sea-shore rotation policy in December 1997 directing that the aggregate sea-shore rotation for enlisted personnel in grades E-5 through E-9 be no more than 4 years at sea for every 3 years on shore. Actual sea-shore rotations, however, depending on the skill specialty and grade level, have ranged from 3 to 5 years at sea for every 3 years on shore. As of February 1998, the total number of sea billets exceeded shore billets by more than 40,000. Consequently, with fewer shore billets available for rotation purposes, less time is being spent ashore than at sea. For years, the Navy has been unable to attain its sea-shore rotation goal because of shortages of shore billets for some skills and the difficulty of duplicating some of the specific skill specialties on shore. Moreover, about 66 percent of the total enlisted billets for specific skill specialties (called ratings) for grades E-5 through E-9 required at sea aboard ships do not easily lend themselves to comparable shore duty, according to Navy officials. These types of billets, called sea ratings, include ratings such as electronic technicians, machinist mates, and various aviation-related specialties. To overcome the difficulty of providing comparable shore billets for all sea ratings, the Navy has had to use general duty shore billets for enlisted personnel that cannot be assigned to their specific rating on shore. General duty billets include such functions as security positions, recruiters, and other duties. Navy officials believe that using personnel in these billets is productive, but such positions should be limited because they can impact training, skill retention, and morale. According to these officials, personnel assigned to general duty billets are not receiving specific training and experience related to their sea-duty rating. Historically, the Navy has attempted to minimize the number of sailors in general duty billets. As of January 1998, the Navy had about 12,500 enlisted personnel working in general duty shore positions. As of August 1997, outsourcing studies announced by the Navy in fiscal years 1997 and 1998 included some military positions for which rotational shortages existed based on the sea-shore rotation policy effective at that time. Of the total 740 Navy-wide military billets announced for study in 1998, 306 billets are for tug operations and maintenance functions that include ratings that have rotational shortages. These included 201 military billets in Norfolk, Virginia, 51 military billets in Pearl Harbor, Hawaii, and 54 military billets in Guam for tug operations and maintenance functions. (See table 1.) We also identified other shore functions that have been announced for potential outsourcing that some Navy officials expect will create or contribute to existing shortages of rotational billets. In fiscal year 1997, the Navy announced plans to study 216 military billets for base operations support functions in Guam for ratings that have rotational shortages. In January 1998, the Navy announced plans to perform A-76 studies for bachelor officer quarters (BOQ) and bachelor enlisted quarters (BEQ) functions of military billets that have rotational shortages. (See table 2.) As of August 1997, data showed that these outsourcing initiatives would further reduce the rotation base for specific ratings and would add to existing rotational shortages. Navy officials told us that the decisions to study these functions for potential outsourcing were made before the Navy had developed servicewide and regional data needed to identify the impact on sea-shore rotations and, as a result, they were unaware of the potential impact. In commenting on a draft of this report, DOD added that, even though the Navy’s decision to study these functions was made before today’s stringent procedures were in place, the Navy concluded after the decision was made that the impact on sea-shore rotation and career progression would be acceptable. Navy officials at the affected installations stated that the Navy’s decision to study these functions for potential outsourcing will seriously affect sea-shore rotation, resulting in the elimination of military billets and fewer opportunities available on shore for enlisted personnel grades E-5 through E-9. Other Navy officials expressed similar concerns and the view that these outsourcing initiatives could result in less flexibility for the Navy and impair career progression and morale for its enlisted servicemembers. In fiscal year 1997, the Commander in Chief, Atlantic Fleet, canceled outsourcing study plans for about 240 military billets in the BOQ and BEQ functions because of Navy-wide rotational shortages for mess specialists and the related impact on sea-shore rotation. Similarly, in fiscal year 1998, the Commander in Chief, Pacific Fleet, canceled plans to begin A-76 studies involving about 63 military billets in these functions for the same reason. Although the funding for these billets had been deleted from the 1999 budget, both commands are planning to reinstate funding authorization by reprogramming existing resources. The Navy also canceled an A-76 study of the BOQ and BEQ functions at the Naval Security Station, Washington, because Navy officials had determined that outsourcing these functions would have further degraded sea-shore rotation. The Navy does not intend to cancel its plans to begin the A-76 studies announced for tug operations and maintenance involving 306 military billets or the base operations support at Guam even though the shore billets that will be eliminated will further impact the sea-shore rotation base. According to Navy officials, the decision to study for outsourcing the tug operations and maintenance function was initially based on the fact that the Navy’s tug boats were old and costly to maintain and would eventually have to be replaced if the tug operations and maintenance were not outsourced. Navy officials stated that several options will be considered to accommodate the impact on sea-shore rotation, such as reclassifying the shore billets to a related billet, general duty billet, or increasing the number of shore billets for those ratings in other locations. Until May 1997, the Navy did not have procedures in place to ensure that rotational requirements were adequately considered when it determined potential functions for outsourcing study. At that time, the Navy adopted policies and procedures to examine Navy-wide and regional effects of its outsourcing plans on the sea-shore rotation base. Specifically, a memorandum of agreement was established specifying the coordination process between the Navy’s headquarters infrastructure officials and the military personnel officials regarding the procedures for studying military functions for potential outsourcing. This memorandum of agreement was further strengthened in September 1997 by a more detailed Navy-wide memorandum of agreement that applied to all major commands for all infrastructure reductions, including outsourcing. Also, in August 1997, the Navy’s Bureau of Personnel provided major commands and other officials with Navy-wide and regional manpower data tools specifying the rotational requirements for each specific rating. Outsourcing officials are expected to use this information to assess rotational requirements of specific ratings for grades E-5 through E-9 when identifying potential candidates for outsourcing. If a rotational shortage is identified, the specific rating is not recommended for outsourcing to avoid further degradation of the sea-shore rotation base. In December 1997, the Vice Chief of Naval Operations approved a set of business rules to further strengthen the policies and procedures for protecting military billets with rotational shortages from potential outsourcing. These business rules require that the overall sea-shore rotation for sea ratings will not exceed 4 years at sea for every 3 years on shore and that the sea-shore rotation for individual ratings will not exceed 5 years at sea for every 3 years on shore. The Vice Chief of Naval Operations directed that these business rules be followed for all infrastructure reductions, including outsourcing. Moreover, Navy infrastructure officials and military manpower officials told us that they are continuing to work closely regarding outsourcing goals and sea-shore rotation requirements as the Navy moves to identify potential outsourcing candidates and meet its outsourcing study and savings goals. Between fiscal years 1997 and 2002, the Navy plans to study 80,500 civilian and military positions for potential outsourcing at an estimated savings of $2.5 billion. The Navy estimates that about 10,000 of these positions will be military billets and the remaining 70,500 will be positions currently occupied by civilians. (See table 3.) Because the funding for the Navy’s military billets is eliminated from the personnel budget when the billets are announced for study, the funding for all military billets approved for competition will be deleted from the Navy’s personnel budget by the year 2003. To eliminate the 10,000 military billets from the military personnel budget by the year 2003, the Navy’s objective has been to announce about 2,000 military billets for study each year for 5 years beginning in fiscal year 1997. In fiscal year 1997, the Navy announced plans to study about 1,400 military billets for potential outsourcing. It appears likely, however, that the Navy will fall short of its goal for fiscal year 1998. As of January 1998, the Navy had announced plans to study 740 military billets and 6,678 civilian positions for fiscal year 1998. Navy officials told us in February 1998 they will announce additional A-76 studies in fiscal year 1998, but did not know the specific activities that would be studied or the number of billets that would be affected. As of February 1998, the Navy was attempting to identify potential functions and billets for outsourcing in subsequent fiscal years, but it had not determined the specific number of military billets or civilian positions that will be announced for study in those years. Some Navy officials have expressed concern over whether they will be able to attain the overall goal of studying 10,000 military billets by the year 2003. In addition, some Navy base commanders are concerned that outsourcing decisions affecting their installations may be made without their input. Despite these concerns, the Navy has programmed estimated savings of $2.5 billion from outsourcing into its future years defense plan, increasing the pressure to identify candidates for outsourcing studies. The Navy has established an ambitious goal for itself in terms of number of positions it plans to study for potential outsourcing under A-76. At the same time, the Navy is relying on its major commands to identify the functions to study to meet these programmed budget savings. Navy officials stated that they began a series of planning conferences in September 1997 involving appropriate officials from Navy headquarters and major commands. According to these officials, one of the primary objectives of the planning conferences is to begin discussing a strategic plan for accomplishing the outsourcing goals for fiscal years 1999 through 2001. While we believe that a strategic plan is necessary to achieve the Navy’s outsourcing goals, ongoing coordination and improved planning between headquarters and the major commands will be required to reach agreement on realistic goals and time frames and to identify areas most conducive to outsourcing and likely to yield the greatest savings. In addition, improved planning and coordination could minimize the elimination of required military shore billets, as well as avoid prematurely programming savings into future years’ budgets. Navy officials stated that, in addition to the recent planning conferences, it plans to address the larger issue of how the Navy conducts its business and possible alternatives for meeting Navy-wide personnel levels and requirements. The Navy established ambitious goals for studying military and civilian personnel positions for potential outsourcing under A-76 competitions. Only as it began initiating the plans for some of these studies involving military personnel positions did it find that outsourcing some of these positions could affect positions reserved for sea-shore rotational requirements—a situation that caused the Navy to withdraw some of its planned outsourcing initiatives. The Navy has recently established policies and procedures to ensure that sea-shore rotation requirements are reviewed and considered when identifying potential functions for outsourcing. While the Navy has recently begun to focus on strategies for attaining its outsourcing goals for future years, improved planning and coordination between headquarters and major commands are needed to reach agreement on realistic goals and time frames. Improved planning and coordination could also identify areas most conducive to outsourcing, least likely to eliminate needed shore billets, and likely to yield the greatest savings. In addition, improved planning and coordination could minimize the elimination of required military shore billets, as well as avoid prematurely programming savings into future years’ budgets. To enhance the likelihood that plans for outsourcing are reasonable and achievable, we recommend that the Secretary of Defense take steps to ensure that the Secretary of the Navy, as it develops its strategic plan, involves the major commands to reach agreement on realistic goals and time frames, and identify areas most conducive to outsourcing. Likewise, we recommend that the Secretary of Defense periodically reassess whether outsourcing savings targets that are used in planning for future years budgets are achievable in the time frames planned. In commenting on a draft of this report, DOD concurred with our conclusions and recommendation (see app. II). DOD provided a number of comments addressing how the Navy has taken significant steps to implement policies and coordination procedures to protect rotational billets from outsourcing considerations and to involve the major commands in the strategic planning process for attaining its future years’ outsourcing goals. DOD noted, and we concur, that a number of studies included in the Navy’s initial outsourcing announcement were canceled because a subsequent review revealed that they were not appropriate competition candidates. Since then, DOD notes that the Navy has made progress to widen the scope of its outsourcing program and to involve all claimants (major commands) in the planning process. DOD indicated that the canceled outsourcing studies cited in our report were not representative of the Navy’s competitive outsourcing program as it exists today. The Navy is currently implementing a number of initiatives to improve strategic planning that should enable them to identify areas most conducive to outsourcing, without exacerbating shortages of rotational billets. DOD also stated that the Navy’s current outsourcing policies and procedures require that no function employing military personnel will be announced for potential outsourcing until the Navy’s Manpower Office determines that outsourcing the function will not have an adverse affect. DOD stated that these activities demonstrate the Navy’s commitment to work with its major commands, and therefore, additional direction from the Secretary of Defense is unnecessary. We agree that the Navy has begun some important actions toward developing a strategic plan and including its major commands in that process. However, the Navy has not completed its plan as of April 1998. At the same time, our report points out that it appears likely the Navy will fall short of its goal for new outsourcing studies in fiscal year 1998, and some Navy officials expressed concern to us over whether they will be able to attain the optimistic goal of studying 10,000 military billets by the year 2003 and save $2.5 billion from outsourcing in its future years defense plan. This goal adds pressure on the claimants to emphasize outsourcing, and accordingly, we believe it will remain critical for the Navy to continue to work with its major commands to complete the development of its plans for accomplishing these objectives. Likewise, we believe it is important to periodically reassess the extent to which savings goals and objectives are achievable and whether savings targets established for out-year budget purposes might need to be revised. In view of this, we have revised our recommendation to recommend that the Secretary of Defense ensure that the Secretary of the Navy, as it develops its strategic plan involves the major commands to reach agreement on realistic goals and time frames, and identify areas most conducive to outsourcing. We have also added a recommendation that the Secretary of Defense periodically reassess whether outsourcing savings targets that are used in planning for future years budgets are achievable in the time frames planned. Our scope and methodology are discussed in appendix I. DOD’s comments are reprinted in appendix II. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committees on Armed Services and on Appropriations and the House Committees on National Security and on Appropriations; the Director, Office of Management and Budget; and the Secretaries of the Army, the Navy, and the Air Force. Copies will also be made available to others upon request. Please contact me on (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Neither the Army nor the Air Force have experienced problems similar to the Navy in making outsourcing decisions, primarily because of mission differences. The Army’s and Air Force’s policies for protecting rotational billets are designed to ensure a proper balance between the numbers and types of billets located overseas and in the continental United States. The types of rotational billets that the Army and Air Force need to protect from outsourcing are generally in highly technical areas that would not normally be appropriate for outsourcing. Moreover, both services rely, to varying extent, on contractor personnel to perform base support type functions. The Navy, on the other hand, operates forward-deployed forces from its ships and requires military personnel to perform virtually all of its support services that might be done by civilians were the Navy operating from land bases. Therefore, the focus of the review was on the Navy. We met with officials from the Office of the Secretary of Defense, the Army, the Air Force, and the Navy regarding their policies for considering rotational and career development requirements in outsourcing decisions. We obtained policies related to outsourcing and rotational billets, memorandums of agreements, and procedures for identifying A-76 study candidates. We also met with officials from the Army Training and Doctrine Command at Fort Monroe, Virginia; the Air Force Air Combat Command at Langley Air Force Base, Virginia; and the Navy Commander in Chief, Atlantic Fleet in Norfolk, Virginia; to discuss their policies and procedures for identifying and protecting rotational billets from outsourcing considerations. We obtained documentation regarding current and planned A-76 studies, and A-76 study plans that were eliminated because of the impact on rotational requirements. We obtained information pertaining to outsourcing and rotational billets from the Navy Commander in Chief, Pacific Fleet at Pearl Harbor, Hawaii, and met with various Navy Base commanders in the Norfolk, Virginia, area to obtain their perspective on contracting out of functions historically performed by enlisted personnel. We reviewed the outsourcing initiatives and the impact of these initiatives on rotational billets in the Army, Air Force, and Navy. However, we focused the majority of our work on the Navy’s outsourcing initiatives and the potential impact of those initiatives on sea-shore rotation. We compared the database of Navy-wide and regional data on the rotational requirements for each specific rating for grades E-5 through E-9 to the Navy’s outsourcing initiatives. We did not independently validate the mathematical models the services used to identify rotational requirements or the criteria they used in building these models. We conducted our review from September 1997 to April 1998 in accordance with generally accepted government auditing standards. David A. Schmitt, Evaluator-in-Charge Sandra D. Epps, Site Senior Tracy Whitaker Banks, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Summary: Pursuant to a congressional request, GAO reviewed whether the Department of Defense's (DOD) outsourcing of commercial activities reduces the availability of rotational billets for active duty military personnel, focusing on: (1) how the Navy's current outsourcing efforts have affected rotational billets; and (2) whether the Navy has policies and procedures in place to minimize the impact of outsourcing on rotational billets in the future. GAO noted that: (1) several Navy Office of Management and Budget Circular A-76 competitions announced for study in fiscal years (FY) 1997 and 1998 have the potential to eliminate military billets in areas where rotational shortages exist for personnel returning from sea duty; (2) as a result, the Navy has decided not to begin some of these A-76 studies and plans to reinstate funding authorization for the military positions eliminated when the studies were announced; (3) until recently, the Navy had not developed specific policies and coordination procedures to protect rotational billets from outsourcing considerations; (4) according to Navy officials such policies and procedures were not needed prior to FY 1997 because the Navy's outsourcing initiatives were limited and not centrally managed; (5) in May 1997, Navy officials signed a memorandum of agreement specifying a coordination process between the Navy's headquarters infrastructure officials and military personnel representatives to ensure that consideration is given to rotation requirements when determining potential functions for outsourcing; (6) this memorandum of agreement was further strengthened in September 1997 by a more detailed Navy-wide memorandum of agreement that applied to all major commands, which the Navy refers to as major claimants, for all infrastructure reductions, including outsourcing; (7) this coordination policy should prove important since the Navy's goal is to have completed A-76 competitions for 80,500 positions by the year 2002, including about 10,000 military billets; (8) the Navy expects that its outsourcing efforts will produce savings and accordingly has programmed expected savings of $2.5 billion into its future years defense plan for FY 2000 through 2003; (9) the Navy has not identified the specific activities and locations that will be studied to achieve projected savings, but has tasked its major commands with recommending specific activities and locations for A-76 competitions to meet this savings goal; (10) the Navy recently began a series of planning conferences involving appropriate officials from headquarters and major commands focusing on strategies for attaining its future years' outsourcing goals; (11) however, given the Navy's plans for outsourcing competitions, ongoing coordination and improved planning between headquarters and major commands is needed to reach agreement on realistic goals and timeframes; and (12) in addition, improved planning and coordination could minimize the elimination of required military shore billets, as well as avoid prematurely programming savings into future years' budgets.