Spend Analysis

Cutting Cost with Zero-Based Budgeting

There’s been a lot of “buzz” recently around Zero Based Budgeting (ZBB) and the use of this method to achieve corporate leanness. Although this budgeting method has been around since the 1970’s, there has been an uptick in corporations actively launching ZBB. A lot of this hype can be attributed to the Brazilian private equity firm 3G Capital and their spotlight with large deal announcements as well as aggressive use of ZBB with Heinz and AB Inbev. Their use of this demanding discipline in which every budget is assumed to be zero at the beginning of each year, and every new expense must be justified, is part of their formula to drive efficiency in the Global food and beverage industry.

Many companies however are not reaping the benefits of a ZBB program and finding it to be too costly, complex and time consuming with unintended damage being done to an organizations culture and brand in the marketplace.

An A.T. Kearney article, Zero-Based Budgeting: Cut Cost, Not Growth – reflects that “zero-based budgeting it is not always the silver bullet many expect it to be” and provides insight as to the undesirable outcomes of ZBB done wrong, Why it often fails and How ZBB can be done right to deliver profitable growth.

Undesirable outcomes of ZBB done wrong:

  • People in organizations dread ZBB and are paralyzed by it.
  • ZBB does not deliver the magnitude of cost savings the company anticipated, causing further disillusionment with the approach.
  • Many of the costs that are successfully eliminated soon creep back in, making all the effort that was required to do ZBB appear futile.

Why ZBB often fails:

  • Targets are imposed top-down, based on superficial external benchmarks and does not address the underlying ways people work or operating mindset of the organization.
  • It’s too narrow in scope and executed within silos with a concentration solely on SG&A. Does not address the operational excellence in core processes across the organization or the fundamental cost drivers.
  • There is insufficient governance of the program and it is primarily done by executive mandate. Without effective governance, it will hinder an organizations ability to achieve cost reductions and prevent the costs from creeping back over time.

Approach to ZBB done right:

  • ZBB targets are broadly defined, bottom up and horizontally across the organization, with clear action pathways to earn buy-in.
  • Scope of ZBB takes a true end-to-end view of what drives value.
  • Governance of ZBB is active and comprehensive.

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