By Jennifer Toomey, Senior Director, Cloud Business Group, Oracle
Zero-based budgeting (ZBB) is making a comeback among financial leaders as they look for ways to more strategically plan and manage spending.
ZBB is a simple concept that has been around since the 1970s. Fundamentally, it proposes that instead of relying on historic spending data to forecast budgets, start at zero and build budgets based solely on costs with a justified need. Companies of all sizes and in many different industries have reported solid results with ZBB, including increased profit margins and changes in how line-of-business (LOB) leaders and other non-financial managers think about spending.
Much has changed in the business world since the introduction of ZBB, including operational practices, workplace cultures, and financial management technology. If you’re new to ZBB, or haven’t used it in several years, here are three best practices that our clients use to achieve success.
ZBB can come with baggage. Some people have had bad experiences with it. Plus, change in general is difficult for people, even in today’s high-tech, rapidly automating workplaces. For these reasons, any ZBB initiative should have a senior-level and respected sponsor who is active in the program roll-out.
ZBB is intended to build long-term organizational resiliency, but during challenging economic times in the past it was used for harsh, non-strategic cost-cutting. Concerns about painful cuts could persist today because ZBB is popular among private-equity owners who are working to turn around underperforming assets.
ZBB projects also meant cumbersome workloads prior to advances like cloud computing and SaaS solutions. Prior to the cloud, ZBB entailed gathering finance and operational data from every corner of the business—usually on hundreds, if not thousands, of spreadsheets. Finance teams then had to spend days consolidating and reconciling these numbers. The advent of the cloud has changed all that: the data now lives in a centralized location that all team members can access via their laptops or mobile devices.
Having an executive sponsor can help to counteract these and other misconceptions and myths about ZBB. The sponsor should communicate the high-level value of ZBB—that is, that more strategic management of investments leads to better performance, which makes companies healthier. Case in point: Kraft Heinz’s ZBB initiative produced impressive results and a record of near-industry-leading EBITDA margins.
Senior-level sponsorship should affirm that ZBB is not a gimmick. It’s a proven methodology that is inclusive of budget owners and gives them the opportunity to determine the best way to spend company resources to achieve business and LOB goals. In this way, ZBB reflects today’s modern workplaces more so than in the past: distributed and collaborative, data-driven decision-making.
As technology enables deeper visibility into what is driving costs and profits, organizations can use ZBB to more smoothly align resources and investments to strategic goals.
On the one hand, ZBB can shed light on opportunities for more strategic spending that have been overlooked or not considered worthy. According to Harvard Business Review, one company used ZBB to determine that its commercial discount was higher than it needed to be—an expenditure that wasn’t being reviewed. Another company used ZBB to solve a challenge specific to its logistics costs: labor costs were non-negotiable, but through a ZBB exercise the company identified a way to reduce costs through negotiations with freight providers.
ZBB also can help to change minds about how spending should be planned. Instead of annual budget planning being a rote process based on traditional spending, each expenditure is scrutinized for what it brings back to the company. The process embeds accountability into decisions.
With heightened visibility, for example, a marketing director could more easily see how spending for digital advertising impacted lead generation, and ultimately won deals. Going deeper, the marketing director could tie digital ad spending to actual revenue and profit generation. Thus, planning for the next round of ad spending using ZBB can be more strategic in terms of actual impact on the top and bottom lines. When the marketing director is asked by her manager what the company gets for its ad dollars, she will be able to show exactly what the company is getting.
The most effective ZBB programs are those that take a broad approach beyond just a budgeting exercise. Technology and tools can support these requirements. In fact, one of the trends driving the ZBB comeback is cloud-based enterprise-performance management (EPM) software.
EPM in the cloud makes the entire ZBB process faster and more transparent. Profitability and cost management capabilities enable the right visibility into profitability and cost drivers, so that users can gain insight into the underlying fundamentals, rather than focus on superficial cost reductions. To support the culture of accountability, cloud-based narrative reporting tools help bring context to the numbers and gain buy-in.
EPM cloud not only provides visibility into the data, it makes it possible to run “what if” scenarios to predict the impact of potential budget changes. The quality of ZBB decision-making goes up when EPM and other cloud solutions run on top of a unified platform that supplies a “single version of truth” for operations across lines of business.
When EPM is augmented with artificial intelligence, machine learning, and other emerging technologies, such a model builds exponential value over time. With every ZBB project, more information about costs and spending is fed into the EPM cloud. The system learns more and gets smarter as it digests and analyzes more data. Predictions, recommendations and actions become more accurate and produce better outcomes.
It’s probably true that every company could benefit from at least trying ZBB. Especially with modern technology and tools, ZBB enables more inclusive and informed decision-making about investments, and it helps participants be more accountable for their decisions. Taking a broad approach supported by executive sponsorhip leads to more strategic and successful ZBB program results.