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.