Cash & Liquidity ManagementCash ManagementCash ForecastingZero-based budgeting makes a comeback

Zero-based budgeting makes a comeback

On both sides of the Atlantic, zero-based budgeting is making a comeback with the latest version incorporating a number of refinements.

Zero-based budgeting (ZBB) is back in a big way.

What some experts are calling ZBB 2.0 is a new take on an old technique. This new version is based on the same principles: strip the budget down and start from scratch. However, instead of zero-basing the budget for everything every year, some companies rotate specific cost areas on a periodic basis. Others are making a big splash the first time and then maintaining the discipline so it gets easier – and less time consuming – each year.

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 reinvent the wheel every year.

Under ZBB 2.0, “once-a-year budgeting will be replaced by constant business monitoring,” said Vic Datta, chief executive officer (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 and a reduced error rate, which means even smaller firms can become adept at making faster and better decisions. Agility is not a matter of speed alone. It’s a measure of how quickly and efficiently a company can make sound decisions.

Over in Europe, Brussels-based Kris Timmermans is a senior managing director who leads consulting multinational 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 financial planning and analysis (FP&A) or cost and is most often applied to overhead cost line.

According to Timmermans, that approach leads to what he calls a smart consumption policy. ZBB changes the behaviour 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.

Doing it better

Still sound overwhelming and overly detailed? Phillip Peck, vice president of finance transformation at Chicago-based professional services firm Peloton, points out that finance today is focusing on doing things better and continuing to deliver value in different ways.

Faced with globalisation, 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 organisational 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.

ZBB doesn’t have to slow companies down, and can co-exist with agile planning methods. According to Peter Hinrichs, vice president FP&A and ZBB at US variety store chain Dollar General and former senior director of global ZBB cost management at the confectionery to beverages conglomerate Mondelēz International, ZBB and disciplines like driver-based modelling can go hand-in-hand.

At Mondelēz, the cost team implemented driver-based modelling for many cost packages (as an example, for travel: the number of trips, the number of travellers and trip characteristics). Granted, a ZBB budgeting cycle is probably is a little longer than a traditional budgeting approach. However, over time, as organisations 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,” says Hinrichs.

Make it stick

What ZBB does that other cost measures do not is make cost savings sustainable. According to Timmermans, that’s essential for companies who want to sustain the savings and reinvest them in growth. The focus on unnecessary cost means that non-working money can be freed up to invest in projects that produce outcomes essential to the corporate strategy. “This is a more volatile world,” he says. “If you want to get your money working, you need a sustainable mechanism.”

A recent Accenture survey of 700 C-level executives found that only 36% of them reported that they were able to sustain cost savings. ZBB promotes a continuous change in behaviour 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 rationalise activities throughout the entire value chain,” says Peck. ZBB needs to be viewed through a process-focused lens.

For more of my insights on FP&A, subscribe to the monthly FP&A e-newsletter from my company, the Association for Financial Professionals. You can also connect with me on LinkedIn or follow me on Twitter.

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