Zero-based budgeting

Why zero-based budgeting is back on the corporate to-do list

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Kellogg Co., Heinz, the Campbell Soup Company, Mondelez International, Alcoa Inc., The Boston Scientific Corp., Jarden Corporation, Quiksilver, Inc., and a host of other large multinationals from a broad spectrum of industries have all gone on record as having adopted a 40-year-old methodology—zero-based budgeting (ZBB). And many of them are pushing ZBB even further, using a more flexible approach that builds a culture of accountability, which I’ll call ZBB 2.0.

In this piece—the first of three blogs on the subject—I’ll explain why ZBB is once again a hot topic and what benefits you can expect from implementing the methodology. The next two blogs will discuss how ZBB is being implemented today and how it’s different from what you may have been taught in grad school, and best practice tips to help get you started will round up the series.

Why is ZBB back on the finance to-do list?

“If you always do what you’ve always done, you’ll always get what you’ve always got.” This quote from the pioneering auto maker Henry Ford sums up why an increasing number of companies are embracing ZBB techniques today. In an economy where cash-strapped consumers increasingly look for everyday value, companies find their margins squeezed. And with direct expenses already trimmed back to the bare minimum, the only place to cut additional costs is sales, general, and administration (SG&A) and other overhead expenses.

Traditional budgeting processes that are based on extrapolating the past year’s expenses fail to provide the detailed insight needed to achieve a step change in the cost base, particularly when line-item expenses are already high-aggregated. So rather than doing what they’ve always done, these companies are embracing ZBB 2.0. It is a newer, more flexible approach that also continues to be effective in building a culture of accountability. Managers are challenged to identify the most cost-effective way to deliver their activities, programs, and levels of service, while keeping their resources in step with changing workloads and eliminating extraneous expenses that are not aligned with strategy.

ZBB focuses on doing the right things in the most cost-effective way

Companies that have adopted ZBB report cost savings between 10 percent and 25 percent—vital savings that companies can use to bolster their margins or invest in future growth. Unlike top-down, across-the-board cost-cutting initiatives that can compromise service levels and damage revenue, ZBB focuses on doing the right things in the most cost-effective way. As such, it provides a low-risk approach to transforming the cost base while leaving companies adequately resourced and well financed for future growth.

Is ZBB for you?

Recent converts to ZBB are typically established companies from the more mature sectors, such as CPG, Apparel, and Manufacturing, which have a large and seemingly inflexible cost base. But ZBB can be scaled to apply to businesses of any size in virtually any industry, with the exception of rapidly growing companies or subsidiaries where the business model and cost base have yet to stabilize. For example, it is gaining adherents with companies in service sectors, such as advertising and hospitality, and in government—in fact, the number of U.S. federal government agencies and departments that use ZBB or ZBB components is 50 percent more than before the 2008 recession.

After years of being in the doldrums, ZBB is becoming a valuable methodology for breaking the mold and starting afresh when it comes to budgeting. To discover how companies are being more flexible in how they implement ZBB and to find out more about the best practices they use, download the Anaplan paper “5 best practices for world-class zero-based budgeting.”

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