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Advice and Information for Finance Professionals

  • November 20, 2017

Why Finance Is In Love Again with Zero-Based Budgeting

Guest Author

By Jennifer Toomey, Senior Director, Cloud Business Group, Oracle

Break out the platform shoes and Bee Gees records. Zero-based budgeting is back, but this time it’s a party instead of a pill—or at least, it has the potential to be.

Invented by an account manager for Texas Instruments in the 1970s and championed by President Jimmy Carter, zero-based budgeting (ZBB) is a simple concept that has suffered a bad reputation. 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.

While more accurate, zero-based budgets traditionally have been more painstaking to develop. In some large organizations, the sheer volume of information involved in creating a new budget has simply been too overwhelming to justify this approach.

Over the decades, ZBB was sometimes used for harsh cost-cutting that starved reinvestment in people and other assets, but it was never meant to be used that way. ZBB should be about long-term resiliency.

Fortunately, ZBB is on the upswing for all the right reasons. Companies of all sizes and in various industries are using ZBB to more strategically manage investments. Bain & Co. reported in 2016 that 80% of surveyed executives in the Asia-Pacific region expected to implement ZBB—a huge jump from 13% in 2015—and globally, four times as many companies were anticipating such initiatives.

Undoubtedly the story of 3G Capital’s success with ZBB at companies such as Kraft Heinz contributed to that rise. Kraft Heinz’s ZBB initiative produced impressive results and a record of near-industry-leading EBITDA margins.

In a volatile market, companies must maintain an edge on the competition while ensuring their processes are as streamlined and cost-efficient as possible. This requires an enterprise-wide view of investment, and traditional incremental budgeting isn’t always fast or accurate enough to deliver this.

Enriched by Cloud Collaboration, Automation

Another reason for the shift to zero-based budgeting is the rise of new finance technologies that greatly simplify and speed up the process. Rather than central teams coordinating thousands of spreadsheets, new technologies manage enormous quantities of data. Cloud-based SaaS applications have been a major driver behind this zero-budgeting renaissance. They make it easier to:

  • Collaboratively deploy and practice ZBB at a global scale
  • Speed time-to-value from a ZBB project
  • Assign clearer ownership of budgeting responsibilities for users

Cloud computing has made it possible for operational lines of business and individual cost centers to participate in ZBB alongside finance managers and directors, so a marketing manager, supply chain analyst, operations-center manager, or any other non-financial professional can be part of the ZBB decision-making process. Today’s ZBB is aligned to the more modern, distributed decision-making model that many businesses use.

ZBB also has had a reputation for being cumbersome and difficult to manage, which is understandable. Until recently, ZBB work was done in isolation and logged and computed in potentially thousands of disconnected spreadsheets. The circumstances likely had a secondary negative impact on results. When people are frustrated and overwhelmed, they tend to make more mistakes and use workarounds that affect accuracy.

Here again, technology has eliminated these problems by enabling centralized and standardized access to up-to-date operational data, as well as same-time collaborative workflows—all without a lengthy back-end IT project. Hence, participants are liberated to think strategically rather than track down data and reconcile discrepancies.

New Strategic Wins with ZBB

Another contributing trend is the depth of knowledge that organizations have today, thanks to data management and analysis technology. This makes ZBB a more flexible and powerful tool. According to McKinsey & Co., a properly implemented ZBB program can reduce SG&A costs by 10% to 15%.  But even more important, those savings can be reinvested in the right projects, spending more where the returns promise to be greater.

Harvard Business Review published an article that encourages organizations to take an ambitious and rigorous approach to ZBB to uncover new ways to redirect assets away from non-value adding costs: “Companies must attack costs not just within organizational silos, but those that reside at the intersection of functions as well, bringing into scope a whole range of costs not addressed in typical ZBB implementations.”

For example, the authors report, one large consumer-goods company viewed a logistics cost gap as unavoidable due to labor issues; the company used a ZBB exercise to identify opportunities to reduce costs through negotiations with freight providers. Another company uncovered an opportunity to save money through strategic adjustment of its commercial discounts—an area that wasn’t even on the CEO’s radar for improvement.

Getting Started with ZBB

The simplicity of ZBB’s foundational premise makes it an exercise that can be started at any time and on any scale. Done right, ZBB can prove to be a highly strategic move that helps companies make smarter investment decisions leading to profitable growth.

Achieving the harmony of the Bee Gees isn’t necessary to be successful at ZBB, but at least with modern technology, more people can sing along.

Our next blog in this series will discuss best practices for your ZBB program.

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