Zero-based budgeting

Zero-based budgeting 2.0—the smart way to prune for growth

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Pruning doesn’t just cut a plant down to size. Removing old wood/stems/leaves stimulates new growth and encourages fruiting and flowering, keeping the plant young and healthy. The same is true of the new approach to zero-based budgeting (ZBB 2.0), which is no longer just about cutting back costs, but about right-sizing today’s businesses to free up resources and cash to invest in future growth. This is something the Ford Motor Company stressed when they recently announced they were “really looking forward” to their planned zero-based budgeting initiative. But apart from the emphasis on reinvesting the savings, what’s so different about ZBB 2.0?

ZBB 2.0 is used selectively

Instead of closely scrutinizing every line item from every department across the company, ZBB 2.0 programs tend to be selectively targeted to sales, general, and administrative expenses, and other large overheads and business units where the cost base is out of step with the market.

ZBB 2.0 initiatives are rotated throughout the business

There’s little point in making the same managers jump through the ZBB hoop every year since subsequent savings diminish. But since it’s also foolish to throw away the knowledge and expertise of running ZBB within the business, the next logical step is to move on to the next subset of expenses and rotate ZBB 2.0 initiatives throughout the business. It’s also a best practice to revisit prior participants every few years to reinforce a culture of cost control and to check that the initial benefits have been sustained. In a recent survey commissioned by Accenture only 36 percent of 700 C-level executives reported being able to sustain cost savings, so it pays to cycle around the organization as a way of making them stick. [Click to tweet this stat]

Over the years, the cumulative expertise that finance teams gain in running ZBB 2.0 programs will make the process both faster and cheaper, so the methodology can be cost-effectively deployed whenever it is needed.

ZBB 2.0 becomes part of standard FP&A processes

Implementing ZBB requires integrating financial and non-financial data to provide better visibility into the operational drivers of costs. In many organizations, the ZBB model will be the first time they have developed causal relationships between the activities of different business functions and the financial line items in their annual budget. So rather than mothball their ZBB model, smart FP&A teams adapt it to support both their annual budgeting process and rolling reforecasts. Repurposing models in this way means ZBB is no longer a standalone exercise, but an initial step in transforming the enterprise planning and budgeting process that could lead to fully integrated business planning.

In the past, ZBB was primarily seen as a “slash and burn” technique to cut costs; today, that is no longer the case. ZBB 2.0 is about renewal—selectively pruning costs to fund business transformation. Read about one company’s experience in the following case study, “Zero-based budgeting delivers the goods in CPG.”

Next time, in the last blog of this series, I’ll look at best practices when implementing ZBB 2.0. Read the first post of the series, Why zero-based budgeting is back on the corporate to-do list.

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