Zero-based budgeting (ZBB) has become a buzzword – again. How can this old budgeting concept attract all this new attention in the age of rolling forecasting and “beyond budgeting”?
ZBB is a cost management technique dating back some 40 or 50 years. It involves redoing budgets from scratch every year, at the most atomic level of details, justifying spend per each cost category – labor, T&E, advertising, and the like. Instead of taking cost and simply tacking on a 3% or 5% increase for the next year, or even keeping it flat, the approach forces managers to justify every dollar each time. According to experts, contrary to what many finance executives think – and perhaps contrary to what it used to be – ZBB is not just a budgeting method. It’s a cost management mindset that affects the entire management culture of the organization.
This is the first of a two-part blog; it explains the resurgence of ZBB. Part 2 will explain how ZBB and agile financial planning can not only coexist but complement each other.
Down into the weeds
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 FP&A or cost accounting, and is most often applied to the 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 afterwards, only parts of it are “zero based,” in areas that are recognized as potential trouble spots – 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.
Does this still sound overwhelming and overly detailed? Philip Peck, vice president of finance transformation at the professional services firm 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.
The press coverage has been a big motivator for many companies to switch to ZBB, particularly players in industries suffering from margin pressure, like consumer goods. At the same time, consulting firms like Accenture have been touting it as part of their toolkit, as benchmarks are crucial in establishing targets – and the more projects you complete, the better your benchmarking database.
What ZBB does that other cost measures do not is make cost savings sustainable. According to Timmermans, that’s essential for companies that 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 700 C-level executives found that only 36% 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.
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