Zero-based budgeting (ZBB) and driver-based budgeting (DBB) – more in common than their names might suggest?
Being aware that the terms they used to describe or classify individuals could adversely influence their self-identity and behavior, social workers and psychologists soon developed an acute awareness about the dangers of “labelling.” Over the years, they have developed an entire theory about it. In management, where the scientific approach is far less rigorous, we pay less attention to the labels that we apply to concepts and methodologies. But they are just as important, and cause untold confusion and misunderstanding.
“Labelling” in management
My first gripe is that we happily use labels without a common definition of what it is we are referring to. As an example let’s consider “Big Data.” Some people use to the term to refer to any collections of data that are too large to process using traditional data processing applications, while others use it to explicitly refer to data generated by social media. In longer articles and blogs, you can generally work out which meaning is intended, but fathoming it out in a 140 character tweet is much more difficult.
My second gripe is that we forget that labels typically describe an ideal type that is rarely encountered in the real world. Anyone who has ever done a Myers-Briggs Type Indicator® will know that ideal types of personality trait such as “introverts” and “extroverts” are very rare, and most us sit somewhere on a continuum between these two extremes. That said, I was once in a management development workshop with an actuary whose assessment report had his score on the I-E dimension printed in the page margin.
Zero-based budgeting and driver-based budgeting – more in common than their names suggest
What got me thinking about all this was reading an excellent piece from McKinsey called “5 Myths (and realities) about zero-based budgeting” so soon after participating in a webinar on the topic of Driver-Based Budgeting. Both methodologies have been around for a decade or more, but both are making a comeback. Zero-based budgeting seems to be gaining popularity as the next way of trimming operating expenses. And after being talked about for years, driver-based budgeting is really taking off now that there are planning solutions that make it easy to deliver. But are they necessarily mutually exclusive?
Zero-based budgeting is based on the premise that organizations should rigorously review every dollar in the annual budget to ensure that it is imperative for transacting today’s business or for building capabilities and differentiation needed in the future. McKinsey suggests that implementing zero-based budgeting depends on developing deep visibility into cost drivers and using that visibility to set “aggressive yet credible budget targets.” The writers specifically mention the importance of managing variable expenses such as labour costs. To me this aspect of zero-based budgeting sounds exactly like driver-based planning and budgeting, as it is also focussed on generating variable line item expenses, such as labor costs, from a zero base by modelling demand with productivity and consumption ratios to identify resource requirements.
So here we have two different labels for budgeting methodologies that have much more in common than initially meets the eye. My view is that these concepts are not mutually exclusive and there is considerable overlap as both relying on understanding how the demands of the business drive resource needs. Implement a driver-based planning and budgeting methodology and most of your variable line item expenses will effectively be “zero-based”; implement zero-based budgeting and you will soon find yourself adopting a driver-based methodology for many line items.