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3
A Strategy for Managing the Infrastructure

The Strategy

Although highly structured, formalized strategic planning activities, with accompanying volumes of data and staff analyses, are no longer in vogue in the private sector, successful enterprises now do implement explicit, well-coordinated plans for action involving all functional departments, with a common set of goals and coordinating mechanisms. The major finding of this study is that the Navy lacks an overall strategy for achieving the resource shifts necessary to support its recapitalization needs.1 This chapter draws extensively from experiences in both the public and private sector and offers a strategy for managing the entire infrastructure.

1The committee's finding that the Navy lacks an overall strategy is similar to a conclusion reached by the GAO in its investigation of the Department of Defense infrastructure. See the following reports: U.S. General Accounting Office. 1997. High-Risk Series: Defense Infrastructure, Letter Report, GAO/HR-97-7, Washington, D.C., February 1,p. 10, available online at < http://www.access.gpo.gov/cgi-bin/getdoc.cg?dbname=gao&docid=f:hr97007.txt>; and U.S. General Accounting Office. 1997. Defense Budget: Observations on Infrastructure Activities, GAO/NSIAD-97-127BR, Washington, D.C., April 4, p. 32, available online at <http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=gao&docid=f:ns97127b.txt>. Furthermore, in the first of these reports the GAO noted the following: “However, breaking down cultural resistance to change, overcoming service parochialism, and setting forth a clear framework for a reduced infrastructure are key to avoiding waste and inefficiency. To do this the Secretary of Defense and the service Secretaries need to give greater structure to their efforts by developing an overall strategic plan.”



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Page 49 3 A Strategy for Managing the Infrastructure The Strategy Although highly structured, formalized strategic planning activities, with accompanying volumes of data and staff analyses, are no longer in vogue in the private sector, successful enterprises now do implement explicit, well-coordinated plans for action involving all functional departments, with a common set of goals and coordinating mechanisms. The major finding of this study is that the Navy lacks an overall strategy for achieving the resource shifts necessary to support its recapitalization needs.1 This chapter draws extensively from experiences in both the public and private sector and offers a strategy for managing the entire infrastructure. 1The committee's finding that the Navy lacks an overall strategy is similar to a conclusion reached by the GAO in its investigation of the Department of Defense infrastructure. See the following reports: U.S. General Accounting Office. 1997. High-Risk Series: Defense Infrastructure, Letter Report, GAO/HR-97-7, Washington, D.C., February 1,p. 10, available online at < http://www.access.gpo.gov/cgi-bin/getdoc.cg?dbname=gao&docid=f:hr97007.txt>; and U.S. General Accounting Office. 1997. Defense Budget: Observations on Infrastructure Activities, GAO/NSIAD-97-127BR, Washington, D.C., April 4, p. 32, available online at <http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=gao&docid=f:ns97127b.txt>. Furthermore, in the first of these reports the GAO noted the following: “However, breaking down cultural resistance to change, overcoming service parochialism, and setting forth a clear framework for a reduced infrastructure are key to avoiding waste and inefficiency. To do this the Secretary of Defense and the service Secretaries need to give greater structure to their efforts by developing an overall strategic plan.”

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Page 50 What Is to Be Achieved? The objective is to provide essential fleet support at reduced cost to make resources available to recapitalize, modernize, and increase the performance of the fleet, and thereby strengthen the Navy's core capability (fielding and using fighting forces) for the next century. The current budget for the infrastructure is $26.7 billion, from which cost savings of $3.5 billion to $5.0 billion are required. How Is It to Be Achieved? The objective can be achieved only by changing the Navy's business structure and modes of providing operational support—specifically, by adopting modern enterprise process technology and practices; competitive sourcing of as many of the support functions as possible with acceptable risk; learning by doing, so that adjustments can be made to these unfamiliar activities along the way; and building in safeguards against loss of support for the core capabilities during the transformation. The following elements are essential to a successful strategy for achieving the shifts in resources needed for recapitalization: • Knowing the cost structure of all the infrastructure activities, so that the Navy can understand where the leverage is, and therefore where to expend its efforts; • Setting goals (money and time), assigning consistent responsibilities and authorities, and making plans that can be followed; • Setting up a management information system to track support-system performance and costs; • Rationalizing command and organizational responsibilities, authorities, and accountability to accord with the overall objective of the strategy; • Preparing revised internal rules and procedures, and proposing legislative changes; • Involving those affected inside the Navy, in other Services, and in civilian communities; and • Obtaining agreements and legislation as needed in the Department of the Navy, DOD, the Office of Management and Budget (OMB), and Congress. With What Is It to Be Achieved? The resource and leadership requirements to accomplish the strategy are discussed explicitly in this chapter. These requirements involve the following: • Commitment on the part of the top levels of Navy command and administration to reach the objective, as discussed in Chapter 4; and

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Page 51 • Adoption of key policy, technology, and business management enablers for systematic use throughout the Navy, as enumerated below. Findings Efforts to date to reduce the cost of the infrastructure (achieved through regionalization, consolidation of functions, personnel and facility downsizing, competitive sourcing, Smart Base initiatives, and so on) have achieved only a small fraction of the resource shifts required to meet the Navy's modernization goals. The committee estimates that these efforts, when fully implemented Navy-wide, could reduce infrastructure costs by about $0.5 billion per year. However, the funds required to modernize the Navy are in the range of $3.5 billion to $5.0 billion per year. These current efforts are, therefore, inadequate to meet the modernization goals. A major evaluation and process change in the way the Navy conducts all elements of its infrastructure operations will be necessary to achieve the added cost reductions required to modernize the fleet. However: 1. The Navy currently does not have a proven methodology for conducting this evaluation or for implementing and managing change in its infrastructure operations. 2. The Navy also does not have a methodology for determining, on a continuous basis, current industry “best practices” for fleet support functions. 3. Networked information systems can be a major enabler for cost reduction by enhancing access to and accountability for services. Compatible software applications and systems and shared information elements that facilitate interoperability for management control must be available, in addition to connectivity, before the benefits can be realized. The committee also believes that the scope of this evaluation and process change, sometimes referred to as “reengineering the organizations,” needs to be broad enough to materially affect all of the major claimants for the infrastructure dollars in question and should go deep into the hierarchy so that responsible managers will have the opportunity to change both the quality of service provided and the cost of delivery. All this must be accomplished within a decisionmaking framework where the interests of all users of infrastructure products and services are represented. The committee notes that no single staff element in OPNAV or the Secretariat has sufficient oversight responsibility and authority to manage all of the infrastructure resources highlighted in Figure 1.2. Thus, responsibilities and authorities to implement change must be made clear and issued by the CNO.

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Page 52 Recommendation The senior leadership of the Navy should immediately initiate a process to improve the business operations of the entire Navy infrastructure with the goal of reducing costs by the $3.5 billion to $5.0 billion per year required to fund modernization of the fleet. To effect needed changes, a proven management methodology should be used that includes the following essential elements: • Establishment of a practical vision of the future, with quantifiable goals, shared by all of the senior stakeholders in the Navy; • Development of strategic proposals to move in the new direction and to deal with obstacles; • Development of tactical plans for implementation, including task forces, milestones, and time tables; • Clear assignment of responsibilities, authorities, and accountability; • Follow-up progress reviews at regular intervals; • Development of key output metrics for success, tracking of accomplishments against them, and requirements for results; • Incentives and rewards for positive performance and punishment for noncooperation; • Celebration of victories; and • Continuous improvement, because change is continuous and cannot be accomplished instantly. This same methodology should be employed at successively lower levels of command to align their goals, incentives, and metrics with the Navy's larger strategic goals until the entire process of change has been institutionalized across the Navy. Navy-Wide Enablers Although the list of business practices that can be used to improve productivity and reduce costs is extensive, the committee recommends that the Navy focus on three key enablers for application throughout the infrastructure and that it make the commitment to implement them fully without exception and without compromise. The three enablers, discussed below in the context of improving Navy infrastructure productivity, are as follows: • Performance measures, cost management and allocation of resources, • Information technology for infrastructure management, and • Competition.

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Page 53 Performance Measures, Cost Management, and Allocation of Resources Level of Service Accurate vision statements are important to establishing strategic plans and measuring progress toward achieving the vision. The committee noted that included in the 21st Century Shore Support Infrastructure: Navy Infrastructure Vision and Strategic Plan is the statement: “Our motto should be: Equal to or better service at equal to or less cost.”2 This theme was evident throughout the committee's briefings and site visits and has clearly permeated the entire organization. Although this philosophy is typical Navy “can do” and is understandable, it is inconsistent with the goal of reducing the infrastructure to the minimum necessary to satisfy the users' requirements. It establishes a particular mind-set throughout the organization that potentially precludes critical analysis of where the goods or services provided exceed user requirements or where the cost of providing the last n percent of quality or quantity is not cost-effective (e.g., as when providing the last 5 percent of the quality or quantity consumes 20 percent of the cost). This kind of critical analysis is a fundamental management tool in determining the “knee of the curve” for providing goods and services and the return on the investment, and it is a necessary component of determining opportunities for reducing the infrastructure without eliminating real required goods and services. If the infrastructure is to be reduced to the level that is necessary, it must be understood and accepted by both the users and the leadership that is acceptable for the infrastructure to provide only the minimum quality and quality of goods and services to satisfy the user's requirements. Finding The current Navy infrastructure vision and strategic plan discussed above may reduce the likelihood of obtaining critical analysis of the value of goods and services provided (e.g., essential services at minimum cost) and thereby impede cost-effective reductions in the infrastructure. Major Recommendation The Navy should change its statement of infrastructure vision to“Essential service at minimum cost.” 2Hancock, VADM W.J., USN, Deputy Chief of Naval Operations (Logistics, N4). 1997. 21st Century Shore Support Infrastructure: Navy Infrastructure Vision and Strategic Plan, Washington, D.C., June 24.

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Page 54 Output Measures The reason for attempting to reduce and streamline the infrastructure is to reduce costs and free up funds to recapitalize the Navy. To date, streamlining has been done mainly by arbitrarily reducing funds for the infrastructure and charging the infrastructure with developing new and innovative means of providing the same or better service at lower cost. There is, however, no way of knowing if the reductions in funds in different areas are too great or not great enough—i.e., will the reduction in funds result in a loss in capability and readiness, or is there potential for even greater reduction? Without a means of measuring the output of the infrastructure, these questions cannot be answered and the Navy is left with trial and error, which potentially can lead to serious degradation in the necessary support provided to the operating forces. Traditionally the Navy has, for the most part, used inputs in determining the performance and requirements of the infrastructure, particularly base operating support. For example, the requirement for funding for real property maintenance is often expressed as a percentage of the current plant value (i.e., real property maintenance “should be funded” at 2 percent of the current plant value). The problem with this approach is that it neither identifies the consequences of funding at higher or lower levels nor relates funding to the capabilities of the facilities being maintained to perform the functions required by the user. A second problem is stating a requirement in terms—usually in financial terms (e.g., backlog of maintenance and repair)—that do not describe the consequences or loss in capability if the requirement is not satisfied. To determine the minimum resource requirements for the infrastructure and relate resource allocations to the ability of the infrastructure to support the needs and readiness of the operating forces, it is necessary to develop measures of performance that capture output. To be most effective, the user(s) must contribute to the process of developing the requirements for output; some such measures for regional bases are discussed in Chapter 2 (in the section titled “Regionalization”). In developing output measures, several steps are required. The process should be iterative and continuous, allowing decision makers, from the program manager to the CNO, to evaluate what is required to support the user and what level of performance should be expected by the user. A recommended process, suggested in Appendix C, assumes that the Navy's regionalization plan is implemented. Funding Vehicles, Paying for Internal Services, and the Navy Working Capital Fund Within the Navy and the Marine Corps, many activities provide services to other parts of the organization. When providing these internal services, there is

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Page 55 always a concern as to how to allocate resources across the many demands, how to control costs, and how to guarantee that customers' needs are best satisfied. A good internal management process should provide cost visibility, performance measurement, cost containment, and customer control. There are basically two ways to pay for services provided internally by an organization: customers pay for services as they are provided, or central management gives a budget to the service provider and directs that organization to deliver its services to the internal customers. Portions of the Navy and the Marine Corps have been using some form of a customer reimbursable system since 1878. As discussed in the Center for Naval Analyses (CNA) report on the Defense Business Operations Fund (DBOF),3 DBOF was created in 1991 to consolidate all of DOD's reimbursable systems under one set of rules. In 1997, the Office of the Secretary of Defense (OSD) returned oversight of the reimbursable systems to the Services and relabeled them as the Working Capital Fund. Across all of DOD, approximately $75 billion in services are paid for by customers, and the Navy and Marine Corps account for about $20 billion of this business. Direct payment to service providers is an alternative to customer reimbursements to service providers for services. Mission funding does not provide the same incentives to service providers to reduce costs and improve performance, but it does guarantee some specific amount of revenue to the service providers and thereby allows for a more stable, guaranteed workload. The Department of the Navy has used both customer reimbursement and mission funding as a means to pay for various infrastructure services for more than 100 years, and is not likely to totally eliminate either process in favor of the other for many more years, if ever. The committee is aware of (1) many of the advantages and disadvantages of the different means of payment for internal services, and (2) some of the current difficulties that customers have with Navy Working Capital Fund (NWCF) services and/or their costs. This study and this committee, however, were neither designed nor tasked to specifically address NWCF or mission funding issues. The committee's primary purpose in discussing the NWCF activities is to make sure that they are included in future Navy efforts to develop and improve measures of output along with mission funding activities. The NWCF activities are providers of a major function of all infrastructure services, and the exclusion of some or all of them from consideration in developing better output measures for the infrastructure would be a major failing. Moreover, the committee observes that the NWCF activities are currently under the management cognizance of the financial managers and comptrollers, 3Trunkey, R. Derek, and Jino Choi. 1996. The Defense Business Operations Fund (DBOF) Problems and Possible Solutions, Research Memorandum 95–196, Center for Naval Analyses, Alexandria, Va., March.

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Page 56 and that there is no equivalent of a chief operating officer for this more than $20 billion annual Department of the Navy business. Although the financial managers focus well on the cost inputs for providing NWCF services, these customer-funded services are as lacking in quality output measures as are the mission-funded activities. Finding The Navy does not have sufficient output measures to properly determine the value of and minimum essential needs for infrastructure goods and services, and to justify the allocation of resources to provide such infrastructure goods and services. Major Recommendation The Navy should establish a management information system to track support-system performance and costs. This system should be based on an integrated set of cost and performance metrics that are developed using fleet user inputs as well as those of service providers. Recommendations • The CNO should put a process in place across the Navy, in each major claimancy and in each region, to develop and maintain output measures for each major function or activity that is provided by the infrastructure. A recommended process for accomplishing this is outlined in Appendix C. • The CNO should ensure that users have a prominent role in developing the requirements for the goods and services to be provided and the funding required to provide them. Users should focus on essential, cost-efficient support rather than better support and on acceptable risk rather than risk avoidance. • N4 should initiate a fresh look at current Navy metrics, such as the requirement for real property maintenance (RPM) and the backlog of maintenance and repair, by reviewing best business practices. • There should be two sets of metrics, one top-level and the other management-level. The top-level metrics should reflect the overall goals of the infrastructure and should measure system cost and effectiveness at the major claimant and Navy-wide level. The management-level metrics should be more clearly related to day-to-day resource decisions at the region or activity level. The metrics should be constructed so that management-level process metrics can be aligned with top-level strategic metrics. • The CNO should direct that N8 set up a system that tracks the top-level infrastructure metrics and helps to assess cost-effectiveness in meeting fleet needs. The elements of such a system would include (1) using a cost model such

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Page 57 as the COBRA model4 (used to establish a cost baseline for comparison of comparable mission and base functions across DOD for the base realignment and closure process in 1991, 1993, and 1995) to establish a cost and performance baseline for infrastructure activities; (2) ensuring that the full cost to the Navy of military manpower is included as a cost variable; (3) linking essential fleet requirements to infrastructure costs; and (4) taking full account of the feedback effects of changes in the support system as consequence of changes in the operating fleet. • The CNO should request that the Secretary of the Navy (SECNAV) task the Assistant Secretary of the Navy/Financial Management and Comptroller (ASN/FM) to appoint an NWCF chief operating officer, responsible for (1) providing greater visibility regarding the cost of individual NWCF activities, including related overhead costs, and (2) overseeing the development of output measures for NWCF activities, to include giving users of services (major claimants) the opportunity to participate in the development of such metrics. Finding The Navy does not have a mechanism or process for determining, on a continuing basis, current industry best practices and performance for comparable functions. Recommendation The Navy should invest in a resource person for each regional commander's and major claimant's staff who is familiar with, and has access to, industry and trade associations and consultants who can provide up-to-date information on current industry best practices for each of the infrastructure functions provided by the region. This information should be used in setting cost and performance goals. A network of such persons with expertise in best practices should be developed for sharing the practices and lessons learned in applying them within the Navy. 4R&K Engineering Planning Systems. 1997–1998. Cost of Base Realignment Actions (COBRA), Roanoke, Va. Available online at <
http://www.rkeng.com/projects/cobra.html>; U.S. General Accounting Office. 1997. Military Bases: Lessons Learned from Prior Base Closure Rounds, GAO/NSIAD-97–151, Washington, D.C., July; U.S. General Accounting Office. 1995. Military Bases: Analysis of DOD's 1995 Process and Recommendations for Closure and Realignment, GAO/NSIAD-95–133, Washington, D.C., April; U.S. General Accounting Office. 1993. Military Bases: Analysis of DOD's Recommendations and Selection Process for Closures and Realignments, GAO/NSIAD-93–173, Washington, D.C., April.

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Page 58 Information Technology for Infrastructure Management At the start of the information age, the DOD led the way in developing both computers and networks. It dominated the marketplace, funding the research and setting the priorities. In 1955, the Navy was considered to have the best computer systems in the world. But a sea-state change has occurred, and today's information technology (IT) industry is leading the charge. DOD currently represents less than 5 percent of IT business. The objectives are to improve connectivity, speed of information flow and information sharing, streamlined operations, and new business models. Success derives from getting the right information to the right people in the right time frame. Connectivity, content, cost, control, sharing, and collaboration are the essential elements to success. A Navy-wide Information Plan The committee acknowledges the difficulty and enormous costs associated with creating an enterprise-wide information plan for an institution as complex as the Navy. However, the payoff is potentially huge because information technology can have an impact on the infrastructure and on shore readiness in two ways. The first is to increase capabilities and provide services in ways that were not possible before. The second is to reduce the costs of providing the fleet with current shore-based outputs by using new means to provide the services. In either case, information systems rarely result in increased capabilities or reduced costs simply by automating tasks being performed by personnel. Rather, information systems are a lever for increasing capabilities or reducing costs by enhancing access to and accountability for data and services. The industrial age revolutionized the Navy by giving individuals control over thousands rather than tens of horsepower. This magnification of human labor revolutionized society as well. A modern revolution in information technology offers the Navy another opportunity to make startling improvements. It provides individuals with unparalleled control over goods, services, and activities that cross the barriers of time and distance. Exploiting this newfound power is key to a cost-effective shore establishment. Information technology in the 21st century is the lubricant that will allow the Navy business to flow with less friction and waste. It holds the potential for integrating ship and shore in ways that were never before possible. Given at the end of this section are the committee's recommendations for evolving a Navy-wide information plan with the following attributes: • Navy-wide information space (infospace): defining, creating, and maintaining it; • Service access: the key to consolidation of infospace-based Navy shore services; and

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Page 59 • Decision support: leveraging the power of managers for cost-effective decision making. Navy-wide Information Space and Its Components The concept of a Navy-wide information space (infospace) is that of an adaptive system defined at any time by a set of performance standards for timely and effective information delivery throughout the Department of the Navy. The infospace includes basic components such as an information network infrastructure and information workstation capabilities that can be adapted to IT technology advances; associated training; and technology refresh cycles. However, it is emphasized that the infospace is a system characterized by a set of connectivity and service goals rather than a set of hardware and software goals. The particular technology solutions can vary, but the goals can and should remain relatively constant. Establishment of connectivity and service goals creates a benchmark against which progress can be measured without constraining the combination of solutions applied to the problem. Although this discussion is aimed primarily at the Navy, the infospace will eventually have to embrace all of DOD. Many of the prescriptions in the following sections can be applied DOD-wide. The purpose of the infospace is to provide an infrastructure for delivery of information and services from any provider to anyone in need of a service. This approach must use Internet technology, rather than attempt to provide new point-to-point connections for each client-server combination. The concept of major information services requiring specific connectivity and specific workstations is no longer economically feasible. There must be a standard vehicle for delivery of and access to information and services. It should include not only a network with sufficient connectivity and bandwidth but also a standard information workstation that all service providers can depend on and develop around (i.e., a standard for developers and providers of software applications). The desired infospace is, therefore, a trusted capability that all developers can depend on (e.g., as it is possible to depend on the existing telephone system). In an ideal system, the issues of how to get connected to users, where those users are, and what capabilities they have will disappear. Such a trusted service delivery system is critical to the Navy's consolidation and regionalization cost-cutting efforts. If all service providers know that they can reliably deliver their service to any user anywhere in the Navy, the design and development task is greatly simplified. In addition, issues of geography and distance can be subordinated to those of cost and effective service. If commanders and managers can depend on the infospace to access and obtain service in a reliable and timely manner, the management need for “controlling our own” is diminished. This lowers many of the cultural barriers to consolidation and regionalization. The key is that on both the provider and the user sides, the infospace must be trusted in terms of security, access, timeliness, and usability.

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Page 71 reviews some of the issues and considers ways to satisfy both personnel and efficiency objectives. Measuring Rotation The Navy classifies all its billets with a sea-shore code. Sea duty billets are those in deployable units or at some of the overseas ashore installations. Student billets are classified separately and are not included in the computed sea-shore numbers. The metric used by the Navy to monitor sea-shore rotation is the sea-shore ratio. This indicator is the simple ratio of time in sea duty to time in shore duty. It is computed only for E5 to E9 billets, because these are considered the career pay grades. Overall, the Navy calculates its sea-shore ratio at about 3.8:3. That is, a career sailor is expected to spend 3.8 years at sea for every 3 years ashore. There is considerable variance across ratings. An important attribute of the sea-shore ratio is that the DOD and the Congress generally accept it as a tool to manage the Navy career force. There are several concerns with using the sea-shore ratio as a management tool: • The ratio is for billets and not personnel. Although manning practices vary, one should protect only military shore billets that correspond to sea billets that are actually filled by people in pay grades E5 to E9. • The metric covers all E5 billets. Although some of those billets are filled by E5s in their first term, rotation is designed for careerists. By including only positions traditionally filled by E5 careerists, the process could have a significant effect on the ratings with 6-year initial obligations. • Student billets ashore are excluded from the shore part of the ratio, although one of the reasons to return personnel to shore is to develop skills that will increase productivity at sea. The committee examined sea-shore ratios for personnel instead of billets, using the Navy's classification of sea and shore billets. Figure 3.1 displays these ratios over time, with the following observations. The jump in 1989 reflects a change in the definition. The top curve represents the ratio for personnel using the Navy's practice of including all E5s and above. That curve shows that the ratio for personnel has averaged 3.3:3 over the past few years. That is, when personnel rather than billets are looked at, there appears to be more than a 10 percent drop in the ratio (from 3.8:3 to 3.3:3). The lower curve includes only career personnel. Comparing the curves suggests two distortions caused by including first-term E5s. It makes the sea part of the career appear larger and the long-term decline look more dramatic than it was. Overall, actual Navy sea-shore ratios for careerists are less than 3:3. Individual ratings may still have

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Page 72 Figure 3.1 Sea-shore ratios for personnel, 1982–1997. considerably higher ratios. The actual sea-shore ratio has been relatively flat since 1991 and generally declined during the drawdown. Effects of Sea Duty The principal reason for managing sea-shore rotation is to keep extended sea duty from reducing retention. In surveys, personnel frequently report family separation as a key reason for leaving the Navy. However, analysis of actual retention rates shows only modest impact of sea duty and time underway on retention. An extensive study in the 1970s showed that a 10 percent increase in expected sea duty (e.g., from 50 to 55 percent) would decrease retention by 3 percent (from 25 to 24.1 percent).12 A later study of retention in the 1980s found similar effects for measures of personnel tempo (perstempo).13 This study 12Warner, John, and Matthew Goldberg. 1984. “The Influence of Nonpecuniary Factors on Labor Supply: The Case of Navy Enlisted Personnel,” Review of Economics and Statistics, February, pp. 26–35. 13Cooke, Timothy, Alan Marcus, and Aline Quester. 1992. Personnel Tempo of Operations and Navy Enlisted Retention, Research Memorandum 91–150, Center for Naval Analyses, Alexandria, Va., February.

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Page 73 looked at actual deployment lengths, time between deployments, and time underway when not deployed. Perstempo had the most deleterious effect on the retention of married personnel. But even here, the greatest impact was from very long deployments, those of more than 8 months. The retention declined from 40 percent to 30.5 percent. Other effects were more modest and in line with the earlier study. The above studies also found that reenlistment bonuses can compensate for additional sea duty. In most cases, reenlistment bonuses that are equivalent to less than 10 percent of regular military compensation (base pay and tax-adjusted allowances) would offset as much as a 25 percent increase in perstempo.14,15 Married personnel would require higher bonuses. Some would still leave, but others originally leaving for different reasons would later reenlist and offset the loss. Hidden Costs of Rotation Fairly recent research16-19 has uncovered a hidden cost of reserving shore billets for military personnel. Activities with the highest percentage of military personnel produce the greatest savings when competed, i.e., opened to competitive bidding. Controlling for the size of the competition and the type of activity competed, public-private competitions of military positions produce 50 percent more savings than competitions of civilian positions. This strongly suggests that the Navy pays dearly by retaining a military person unnecessarily in a shore position that could be competed. Although these results may have been unexpected, they are consistent with other general observations: • Young individuals tend to be less productive than older individuals, at 14Cooke, Timothy, Alan Marcus, and Aline Quester. 1992. Personnel Tempo of Operations and Navy Enlisted Retention, Research Memorandum 91–150, Center for Naval Analyses, Alexandria, Va., February. 15Sharma, Ravi, and Henry Griffis. 1995. Implications of Changes in Time Spent at Sea,Research Memorandum 94–150, Center for Naval Analyses, Alexandria, Va., April. 16Marcus, Alan J. 1993. Analysis of the Navy's Commercial Activities Programs,Memorandum 92–226.10, Center for Naval Analyses, Alexandria, Va., July. 17King, Angela L., Angela M. Rademacher, and R. Derek Trunkey. 1996. An Examination of the DoD Commercial Activities Inventory Data, Information Memorandum 471, Center for Naval Analyses, Alexandria, Va., December. 18Trunkey, R. Derek, Robert P. Trost, and Christopher M. Snyder. 1996. Analysis of DoD's Commercial Activities Programs, Research Memorandum 96-63, Center for Naval Analyses, Alexandria, Va., December. 19Snyder, Christopher M., Robert P. Trost, and R. Derek Trunkey. 1998. Bidding Behavior in DoD's Commercial Activities Competitions, Research Memorandum 97-68, Center for Naval Analyses, Alexandria, Va., January.

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Page 74 least between the late teens and mid-fifties. Contractors often use older workers to do work previously done by younger military personnel. • Turnover reduces the productivity of workers. Rotation by definition moves people continuously through the activity. With a 3-year rotation, the average worker has only 18 months at the activity. Contractors keep workers longer and lessons learned are more likely to persist over time. • Organizations that are predominantly military have limited ability to use part-timers and temporary workers. Contractors can, at apparently less cost, use overtime during surge workloads and reduce the number of full-time employees. • Military personnel are not accounted for in local budgets, because these costs are handled centrally. Although local activities do not purposely overuse or misuse personnel, costs are hidden in a budget sense, and no one can free up funds for other uses by cutting military personnel. As a result, the system is biased toward having excess people. • The demand for work performed by military personnel is often unconstrained by cost. For example, civilian depot costs are often covered by reimbursements from the fleet, whereas the military intermediate maintenance facility costs are not. When there are choices, the fleet tends to use the latter facilities. Although depots attempt to bring down their costs, the intermediate maintenance facilities have no such pressures. Reconciling Efficiency and Personnel Objectives Some shore jobs must remain military. Some of these jobs require personnel with recent operational experience or provide additional skills for later tours. But for many jobs, this is not the case, and in most cases there is a hidden cost. The Navy faces a dilemma in deciding which shore billets can most easily be competed or staffed by civilians. If it eliminates general billets that are unrelated to sailors' jobs at sea, it has reduced its flexibility in assigning personnel ashore. Training and maintenance billets, for example, require personnel with the appropriate rating and Navy enlisted classification (NEC). Yet the rotation needs of individual ratings may shift over time and the shore billets may not match. The clear point here is that the Navy must consider the efficiency gains, the impact on skills, and the flexibility in making assignments when it considers which functions and billets to target for competitive sourcing and other infrastructure efficiencies. As a general observation, the committee believes that the process for selecting military billets for competition and other efficiencies is weighted too heavily to standard sea-shore goals. For example, the Deputy Chief of Naval Operations, Manpower and Personnel (N1) currently has veto authority over the inclusion of military shore billets. It is the committee's view that the decision needs to be based on the inputs of all stakeholders. Disagreements could be resolved by the Vice Chief of Naval Operations (VCNO) as the final arbitrator.

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Page 75 There are many ways to reconcile efficiency and personnel concerns. For one, the Navy should try to identify alternative ways to improve sailors' quality of life. For example, many sailors find workloads while in home port to be particularly onerous. Since about half of the time in a sea billet is spent at the home port, those working conditions should be reviewed. Tiger teams on the base could move from ship to ship to reduce long workdays when the ship is in port. Also, time underway when not deployed can be better utilized, so that there are fewer days away from home. The Navy could consider increasing compensation. As noted above, many sailors would accept an additional year or two, or even another sea tour, for additional pay. The most effective tool is almost certainly sea pay, which could be targeted to those at the end of their sea tours. Not all need to accept this offer for the Navy to cut into the number of required shore billets. Another option to consider is including the employment of military personnel as part of private contracts. That is, the contractor would agree to use some of the personnel in the performance of the service to the Navy. There are several benefits and limitations to this approach. First, if the Navy outsources to a highquality provider, it will benefit from the training its personnel receive in leading business practices. Second, military personnel will eventually benefit when they leave the Navy because they can cite private-sector experience. To the extent that there are savings, they result from the Navy having fewer people in support activities. If a contractor is using military personnel, the Navy will still pay for them directly or, if the contractor pays part of the military personnel cost, the Navy will pay indirectly through the contract price. Also, this option does not address the drawdown in ashore requirements resulting from other efficiencies, such as regionalization, Smart Base, and direct vendor deliveries. Another way to keep some of the military shore billets is for the Navy to include military personnel in their MEO and participate in the competitions. When military positions are now competed, they are automatically converted to civilian positions for the in-house bid. To keep some military positions in the in-house bid would require more flexibility in switching funds between Navy military personnel (MPN) and O&M. However, the evidence is that contractors will win most of these competitions, and only a few billets will be saved. Also, this approach along does not help with other labor-saving initiatives. Another solution would integrate military personnel with government civilian personnel. The Navy has started to do this in maintenance, where the civilian depot work force and the military intermediate maintenance work force are being combined. The merger allows for downsizing through the reduction in excess capacity and scale economies. It also may improve the productivity of both the civilian workers, who bring to the job greater maintenance expertise, and the military workers, who bring to the job the understanding of operational usage and diagnostics. More importantly, this may allow the Navy to cut civilian workers in lieu of its military workers. This approach works because of the

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Page 76 excess capacity at the depots. However, just as there is a hidden cost in using military personnel instead of private civilians in many areas, it is also likely that there is a hidden cost in using military personnel instead of government civilians in many jobs. In the long run, the Navy needs to cut personnel at sea. Programs such as Smart Ship can cut into those requirements. Cutting those billets not only reduces shore billets reserved for sailors, but it also cuts into the total number of support personnel needed. Infrastructure efficiencies can reduce the need for facilities and the associated construction costs. They can also cut inventories. But the biggest costs are in personnel, and it is those costs that must be cut if the Navy is to shift resources from support into modernization. A-76 Competition Practices In its visit to the San Diego naval bases, the committee was briefed on successful public-private competitions (e.g., family service centers) and a private-private competition for third-party deliveries of office supplies throughout the area. Drawing on these experiences, and those of others,20 the committee offers its suggestions on ways to improve the numbers and quality of local A-76 competitions. First, the Navy should remove the local obstacles to effective competition. Today, managers of local activities have little or no reason to downsize or compete unless directed. Currently, installation managers must (1) pay for conducting the analyses leading to the competition, (2) incur the inconvenience or hardship of losing employees and dislocation, and (3) return the savings realized to the U.S. Treasury—all while being measured on the level of service provided. Second, the Navy should focus on larger competitions, anticipating the results of regionalization, by carrying out process redefinition and holding competitions concurrently. For example, if a larger number of qualified bidders could be solicited, functions might be combined, since experience shows that the percentage of savings per billet increases with the size of the function competed. Third, those in the chain of command must unequivocally support the competitive process. Because the supporting analyses of solicitations take several years in most cases, formalized organizations charged with planning and implementing major competitions will be required to provide continuity as the leadership rotates. 20Trunkey, R. Derek, Benjamin P. Scafidi, Francis P. Clarke, Cheryl Kandaras, Andrew M. Seamans, LCDR Carolyn M. Kresek, USN, Robert P. Trost, Angela L. King, Christine H. Baxter, Kerensa E. Riordan, Steven Smith, and Michael Ye. 1998. Moving Forward with A-76 in the Navy, CRM98-9.10, Center for Naval Analyses, Alexandria, Va., April.

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Page 77 Findings In the areas of competition and sea-shore rotation, the committee's key findings are the following: • The Navy's decentralized tactical process to identify A-76 competition candidates and to execute the program is not producing the large competitions necessary to reach the Navy's goal. Larger, more strategically executed competitions are needed to attain the Navy's competitive sourcing goal. • Larger competitions have traditionally produced greater initial savings. In the past, competitions for fewer than 10 positions produced estimated initial savings of 22 percent; competitions for activities with more than 200 positions produced savings of 45 percent. • Supporting findings: There are still significant opportunities to reduce costs with competitive sourcing. —According to the Navy's records, there are 300,000 commercial activity positions (of which 60 percent are civilian) and, at most, only 10 percent have been previously competed. Even if all traditionally noncompeted work (such as depot maintenance and R&D) were excluded, the Navy would still have 55,000 civilian positions and 17,000 military positions available for competition. —Using the estimated savings from the 1980s competitions and adjusting them for changes in the mix and size of activities and the civilian-military makeup of the work force would suggest slightly lower initial savings: from 31 percent to 27 percent. However, to the extent that there are trends, estimated savings have increased over time. If competitions are arranged by the year in which they were decided, the estimated percentage saved is higher in the later years. Also, the drawdown in forces and manpower seems to have had no effect on the percentage saved. The DOD work force peaked in 1987. The estimated percentage saved continued to increase into the early 1990s, when the earlier program ended. The most recent competitions are producing estimated savings greater than the historical 30 percent average. In the Navy, each of the three Navy competitions completed in 1997 and 1998 had estimated savings of more than 35 percent. The Air Force reports that it is now initially saving an average of 34 percent. Other DOD efficiency initiatives are either increasing or not affecting the savings from competitions. For example, the Navy regionalized and competed three family service centers concurrently in the San Diego region, an approach that produced greater savings than would have resulted from three separate competitions. Also, the Navy has used efficiency reviews in an attempt to reduce costs. Although the internal efficiency review at the telecommunications facility in Stockton, California, produced no savings, a later competition produced an estimated initial savings of 37 percent. —Many military personnel remain in commercial activities, and personnel policies are a major limit on the number of billets available for competition,

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Page 78 with only 16,800 of 138,000 military shore billets available for competitions under the implementation of current policies on sea-shore rotation and homebasing. The Navy has limited its own flexibility to target activities and consolidate them into larger competitions. Conclusions Past uses of competition, for the most part, are based on the practices of the 1980s, which were far from optimal. Recently, there has been a revolution in strategic sourcing in the commercial world. Moreover, although some shore jobs must remain as military positions, the Navy needs to better reconcile its infrastructure efficiency and seagoing personnel management objectives. This should increase opportunities for competition. It is the committee's conclusion that the Navy could increase savings further through actions such as the following: • Taking a more strategic approach to competitions. The Navy can bundle positions for competition, select sources as long-term partners, and induce continuous improvement to match the practices of innovative commercial firms. • Regionally competing support functions. The Navy now can take advantage of scale and scope economies. Half of the competitions between 1978 and 1994 were for 14 or fewer positions. Competitions of that size are relatively costly to administer, do not attract the most successful firms in the private sector, do not provide opportunities for economies of scale or scope, and produce the least savings. In the past, 37 percent of competitions for 10 or fewer positions produced no savings, whereas only 4 percent of competitions for 100 or more positions produced no savings. • Requiring OPNAV approval to cancel competitions. Many competitions are being canceled by command-level authority. • Continuing to critically review inherently governmental positions. Many of these jobs could be commercial, and the use of this exemption category varies considerably across locations and parts of DOD. • Removing disincentives to competitive sourcing. Until recently, local commands paid for the competitions but did not keep any of the savings. Headquarters should pay the cost of the competition and allow local commands to keep some of the savings to improve facilities and quality-of-life services. • Adjusting military personnel policies to allow for competitive sourcing of more continental United States (CONUS) shore positions. For example, the Navy includes sea billets normally filled by first-termers to justify shore billets for its careerists. In some cases, additional pay may be required to attract personnel to longer operational tours or shorter CONUS tours. Given that planned savings from competing functions performed by military personnel far exceed those from competing functions performed by civilians, targeting additional pay

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Page 79 to those affected could be a cost-effective approach to increasing the number of military positions available for competition. • Creating competition support offices as corporate repositories of lessons learned and providers of expertise. Regional and local commands will be less frustrated if they know how others have solved problems similar to their own. • Committing strong leadership to overcome resistance throughout the Navy and DOD. Large-scale use of competition requires a commitment from those at the top. • Making provisions for sea-shore rotation slots in any competitive sourcing. That is, Navy personnel could work in contractor-managed billets for their shore rotations. To increase retention, contractors could be prohibited from hiring military personnel until they had completed another sea rotation. Major Recommendation The Navy should use competitive sourcing as a preferred approach to selecting the best providers of all support. In this regard, the Navy should establish a cross-functional team under the Assistant Secretary of the Navy/Installation and Environment (ASN/I&E) and the Assistant Secretary of the Navy/Research, Development, and Acquisition (ASN/RDA) to be responsible for overseeing the execution of competitive sourcing in business operation areas approved by Navy leadership. In addition, the Navy should address all existing constraints in sea-shore rotation. The CNO should broaden the objective to managing seagoing personnel as a part of total naval personnel management and should direct relevant elements of the Office of Naval Operations (OPNAV) and second-echelon commands to search for innovative ways to satisfy the morale and retention needs that allow greater flexibility in reducing the cost of the infrastructure. Recommendations—Competition • The SECNAV-OPNAV-fleet team should determine the best approach for each business operation area with respect to stopping provision of services in-house and instead establishing private-private competitions, public-private competitions, government-owned contractor-operated facilities, or public-private partnerships. • The Navy should no longer depend on a bottom-up tactical approach. The senior cross-functional team should recommend to the CNO and SECNAV particular areas in which to stop in-house provision and instead consolidate into large, more strategic competitions. • The CNO should develop a schedule for the actions recommended above that reflects the urgency of reducing costs in business operations.

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Page 80 Recommendations—Managing Seagoing Personnel • The CNO should expand the Navy's current objective beyond sea-shore rotation to finding the best ways to attract and retain sailors. • The CNO should task an appropriate independent analysis and research firm to better define the relationships among sea tour lengths vis-à-vis shore tour lengths, sea pay, time with family, work satisfaction, and other appropriate factors, to determine the impact on moral and retention of seagoing personnel. • The CNO should establish an ongoing dialogue between the CNO staff (including all stakeholders in reducing the cost of the infrastructure) and the fleet commanders to better define the specific attributes of maintaining morale and retention of seagoing personnel in the Navy. • The CNO should direct relevant elements of the OPNAV and second-echelon commands to (1) search for new and innovative ways of satisfying the morale and retention requirement that would allow greater flexibility in reducing the cost of the infrastructure, and (2) carefully review the requirement or policy for the shore duty billets to be closely associated with the skill(s) required at sea. In addition, the committee recommends the following: (1) balance the potential gain or loss of skills with the loss in flexibility in accommodating new opportunities for privatization of functions; (2) strive to obtain better integration of shore duty billet policies with larger Navy programs and competitive sourcing initiatives; (3) continue and expand the merging of intermediate-and depot-level maintenance programs with military personnel integrated with civilians in shipyards and NADEPs; and (4) look for ways to make use of military personnel in other contractor facilities and in competitive sourcing contracts. • The CNO should change the veto authority of the N1 over billets nominated for competitive sourcing to one of greater management consensus by all of the stakeholders, with the VCNO as the final arbitrator. Implementing the Strategy Changes of the kind and magnitude visualized under the strategy outlined in this chapter do not come easily to a large, tradition-based organization. In part, the changes will be induced by the new Navy systems that are acquired, in which new technologies and new system designs will make their own demands on the support system. However, the Navy cannot wait to implement infrastructure change with new acquisition programs. An intensified campaign to make the most of the opportunities presented, especially when it entails extensive organizational and budgetary shifts, will be challenging in the extreme and should be initiated now. The changes involved will entail risks to achieve the benefits sought, and managing—not minimizing—risks will be essential to success. The benefits to be achieved are obvious. The portion of the Navy's personnel, material, and other resources available to apply to the Navy's core systems

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Page 81 and missions will be increased. The Navy's use of highly trained personnel can be better applied to those systems and missions. In improving shore support, the quality of life of Navy personnel and their families will be improved, leading to higher rates of retention and better-trained crews. Overall fleet readiness and combat capability will be improved within given, constrained budget levels. Also, tendencies toward isolation of the Navy from the civilian economy and population that may have attended the shift to an all-volunteer, career force and reduction of its supporting infrastructure through the BRAC process will be lessened or reversed. The risks are those attending disruption and establishment of new organizational connections and procedures. Traditional organizational responsibilities and authorities will be shifted to other who will have to learn how to use them in new circumstances. Unfamiliar funding patterns will require different justification that may be more difficult to support with budgeting authorities, such as OMB and the Congress, to which the new patterns will be unfamiliar. The order of sequentially dependent changes may be lost in the processes of overcoming institutional resistance, throwing the effectiveness of such changes in doubt without remedying the negative effects of the disruptions or gaining all of the positive benefits that were sought. Mistakes will be made. Some may be costly, using resources sorely needed for substantive investments; other may be irretrievable in a less forgiving oversight environment, causing ripples that could further disrupt the process of change. In the last analysis, all such risks entail potential added expenditures of time and resources in effecting the sought-after changes, with the chance of using the fleet's financial resources ineffectively and, in consequence, hurting its readiness and combat capability. The benefits, to the extent that they are achieved, will greatly enhance resources available for the Navy's core missions and capabilities, and its readiness along with them. It is the balance between the risks and rewards that must be weighed by Department of the Navy decision markers in taking each step of the strategy to rationalize the fleet system and its support component. Perhaps the only certainty in the equation is that failure to take at least some of the risks will lead inevitably to further decline in the fleet's efficient and effective use of any available resources, and consequently in its size, capability, and readiness. There thus seems to be no alternative to going forward, managing the risks as they are anticipated and felt.