Zero-Based Budgeting And Agility: Friends Or Foes?

Nilly Essaides

Part 2 of 2. Read Part 1.

Zero-based budgeting (ZBB) 2.0 is the new iteration of an old cost-management technique. The question is: Can budgeting at an atomic level succeed in a fast-changing world and coexist with concepts like agile planning? Experts say the two can actually complement each other.

Making smarter decisions faster

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 with a reduced error rate, which means that even smaller firms can become adept at making better decisions faster. 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 driver-based modeling for many cost packages (for travel, for example: the number of trips, the number of travelers, and trip characteristics).

Granted, a ZBB 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.

You can also consider ZBB to be not just a budgeting concept, but rather a culture and a lifestyle. It’s about how companies are managed: setting targets, building budgets, establishing financial incentives, managing costs on a daily basis, and forecasting future spending. ZBB tends to focus more on the cost side than on revenue.

What’s in a name?

There’s no question that FP&A teams are driving toward a more agile planning and decision-making process to help manage the fast-changing business environment. At the same time, however, companies need to be more efficient in their allocation and usage of scarce resources. According to Philip Peck, vice president of finance transformation at the professional services firm Peloton, ZBB and agile forecasting and business planning are very complementary.

ZBB is all about active expense management and accountability. It’s the “historic” name and connotation that seem to get in the way. “All you need to do is rename it,” he mused. “Then you can apply ZBB principles and the overall philosophy and not necessarily do a budget from zero-base every time.”

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.

ZBB creates an environment where companies can move faster and more efficiently. “You have a line of sight into how things are controlled, so you can really look at the cost of new revenue. It ultimately allows for more flexible budgeting and forecasting,” added Mark S. Hopkins, a partner at Deloitte Consulting LLP. Indeed, a budget based on a “system” may be faster to create than one based on “negotiations.”

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Nilly Essaides

About Nilly Essaides

Nilly Essaides is senior research director, Finance & EPM Advisory Practice at The Hackett Group. Nilly is a thought leader and frequent speaker and meeting facilitator at industry events, the author of multiple in-depth guides on financial planning & analysis topics, as well as monthly articles and numerous blogs. She was formerly director and practice lead of Financial Planning & Analysis at the Association for Financial Professionals, and managing director at the NeuGroup, where she co-led the company’s successful peer group business. Nilly also co-authored a book about knowledge management and how to transfer best practices with the American Productivity and Quality Center (APQC).