Zero-Based Budgeting Makes a Comeback
Zero-based budgeting (ZBB) is back in a big way.
What experts are calling ZBB 2.0 is a new take on the old technique. This new version is very much based on the same principles: strip the budget down and start from scratch. But it is broader and more targeted. ZBB 2.0 is a cost management strategy; it’s not just about budgeting. And some companies are applying it more strategically. Instead of zero-basing the budget for everything every year, they rotate areas on some periodic basis. While it may seem counterintuitive at first, ZBB can and does coexist with concept like driver-based modeling and rolling forecasting. In fact, according to some practitioners and experts, they complement each other.
Brussels’-based Kris Timmermans is a senior managing director who leads Accenture’s enterprise-wide cost reduction and supply chain practices. What Timmermans calls “ZBB 2.0” is very different from what ZBB used to mean when it first came on the scene. While it still requires an almost forensic level of visibility, it has evolved into a technique that could sit in either financial planning and analysis (FP&A) or cost and is most often applied to overhead cost line.
Other experts also add that in ZBB 2.0, the budget is not necessarily shredded every year, it may be done on initial implementation. Annually after, only parts of it, in areas that are recognized as potential trouble spots, are “zero based”—a much more manageable exercise. According to Timmermans, that approach leads to what he calls a smart consumption policy. ZBB changes the behavior by leveraging best practices. The key to ZBB 2.0 is to make sure that managers are not left to spend the savings as they please. What helps is a governance structure that separates it out and reinvests it through a formal mechanism and the application of rigorous analytics.
Still sounds overwhelming and overly detailed?
Phillip Peck, vice president of finance transformation at Peloton, pointed out that finance today is focusing on doing things better and continuing to deliver value in different ways. Faced with globalization, the accelerated pace of change, and the increased complexity of the business environment, FP&A is looking to overhaul traditional planning processes and create a more dynamic, flexible and adaptive planning and analytics environment that drives optimal usage of organizational assets and resources. ZBB provides a proven framework, tools and templates to assist with evaluating organizational efficiency and identifying areas where resources can be reduced and/or redeployed and used for more value added activities.
Under ZBB 2.0, “once-a-year budgeting will be replaced by constant business monitoring,” said Vic Datta, CEO of consulting firm Resilicore. He posits that new technology tools allow companies to run a version of ZBB at a fraction of the time and a reduced error rate, which means even smaller firms can become adept at making faster and better decisions. Agility is not a matter of speed alone. It’s a measure of how quickly and efficiently a company can make sound decisions.
According to Peter Hinrichs, vice president FP&A and ZBB at Dollar General and formerly senior director of global ZBB cost management at Mondelēz International, ZBB and disciplines like driver-based modeling can go hand-in-hand. At Mondelēz, the cost team implemented DBM for many cost packages (e.g., for travel: the number of trips, the number of travelers and trip characteristics).
Granted, a ZBB budgeting cycle is probably is a little longer than a traditional budgeting approach. However, over time, as organizations become more mature in managing spending, “you can likely expect shortened budget cycles as you may elect not to do bottoms-up for all packages,” Hinrichs said.
Similar to the initial implementation of a driver-based rolling forecast framework, the initial application of ZBB principles will likely involve examining all activities and related expenses. But after the initial cycle, attention can be focused on the most strategic areas of significant spend. The power of the ZBB mindset is that it instills ownership and accountability for cost at the lowest relevant level. The key is to make sure that functions and their activities optimally support the company’s strategic objectives. Companies that do this well don’t need to recreate the wheel every year.
What ZBB does that other cost measures do not is make cost savings sustainable. According to Timmermans, that’s essential for companies who want to sustain the savings and reinvest them in growth. “This is a more volatile world,” he said. “If you want to get my money working, you need a sustainable mechanism.” A recent Accenture survey of 175 C-level executives found that only 36 percent of them reported that they were able to sustain cost savings. ZBB promotes a continuous change in behavior and accountability that is becoming recognized as a proven way to sustain the savings.
“The big success stories are where ZBB was integrated into the business management process and culture and became an opportunity to rationalize activities throughout the entire value chain,” Peck said. ZBB needs to be viewed through a process-focused lens.