Money is money, wrote Gertrude Stein in the Saturday Evening Post in 1936, questioning whether people thought of money as money regardless of the amount. The concept behind zero-base budgeting should be thought of similarly.
The idea behind zero-base budgeting is to start from a base of zero instead of using the current budget as a starting point for next year.
The original idea proposed in 1970 by Peter Pyhrr, a manager at Texas Instruments, was to begin with a description of each company activity in a decision package concept. Then the management team would rank the packages and allocate resources on the packages that got the most votes.
It is during the creation of the decision package concept and continuous monitoring of the allocation of resources where procurement analytics and systems play a central role in supporting the zero-base budgeting process.
Design package concept
The design package concept involves understanding the benefits and cost drivers and subsequently determining the budget/allocation needed. During this process, it is critical that companies have a deep understanding of all costs at a sufficient level of granularity so that they can effectively control them. One component of costs is naturally third-party costs stored within procurement systems. An effective procurement system would store all line items that were purchased or paid along with the associated quantity, unit of measure, supplier, price, etc. In addition, an effective procurement system would help categorize all third-party costs so that the costs can be analyzed and grouped by different variables: cost center, business unit, spend category, geographical region, etc.
Monitoring of spend
As with any initiative like this, it is important to monitor progress and quickly self-correct. There are three common ways procurement analytics and systems can support the monitoring of progress:
- During the creation of purchase orders or invoices – A procurement system can be set up to check the available budget to determine if the user should be allowed to create a PO or invoice against the budget, or if the budget is completely utilized.
- Regular spend monitoring – A procurement system can be set up with prepackaged reports by different variables for the budget owners to evaluate what has been charged to the budget and the amount remaining.
- Workflow approval – A procurement system can also be set up in such a way that budget owners have to be kept informed or maybe approve any requests against the budget allocation.
The application of procurement analytics and systems in the zero-base budgeting process is key to ensuring successful outcomes for your company’s initiative. More than 45 years after the initial introduction of zero-base budgeting, large and small companies are now revisiting this method to drive cost out of the system. After all, money is money, and procurement analytics and systems play a significant role in this area.