Don’t believe the hype - Zero Based Budgeting is about providing more choice
December 18, 2018
Zero Based Budgeting (ZBB) methodology has received a lot of press, sometimes negative, for creating an aggressive cost cutting culture. However in our experience, the extent to which you as a business embrace cost cuts is a choice; and the way that the ZBB methodology is implemented lends itself to informing this choice.
ZBB methodology starts the budgeting process with a clean slate (from zero) and builds the future costs up from the lowest possible level, creating visibility in the process. This enhanced transparency enables companies to make informed decisions unlike in a standard/traditional cost reduction programme where targets can be arbitrary and savings projects ad-hoc.
In this blog we explore how visibility is the lynchpin of a successful ZBB programme and how it can help you make right choices
ZBB requires you to assign costs to the smallest product or activity at the lowest level possible. For example, usually marketing budgets are based on brands or countries. Each year the budget is set as a blanket adjustment to prior year. However, under ZBB, the marketing department will be required to to build the budget up from zero for the various marketing activities such as agency, digital media, events etc, for each brand and each country.
Once costs are categorised this way, we can challenge assumptions and drivers at each level.
- Is the spend required? What value does it drive? For example, is the reach large enough to justify spending on digital media?
- Is there scope to flex quality and frequency of spend? For example, can we reduce online media spend and update the website less frequently?
- Change price through renegotiation, tender or consolidation of suppliers
- Adjust demand such as by extending lead times which often comes at lower price etc
The outcome is a long list of cost reduction opportunities and then you can decide how far you want to go.
For example a global food manufacturing company used this methodology for its marketing budget across various cost categories. Below we have a sample output of the opportunities in events and digital media categories. This opportunity list is created by asking the above questions.
|Is the spend required or what value does it drive?||Is there scope to flex quality/frequency of specification?||Can we adjust the price?||Can we adjust demand?|
|Events||What is the 'return on investment (ROI)' for each event - Stop participating in some events due to low ROI?||Invest in buying multi-use stall equipment rather than single use equipment each time||Agree on the full year price for stall contract workers by preplanning the campaigns calendar||Limit the volume of giveaways at events based on footfall estimates|
|Digital media||What is the reach for digital media or can we achieve same reach for less in non-digital channels||Buy lower-service level packages (example manage new content for website versus also manage online customer complaints)|
In addition to challenging the assumptions, we can benchmark the cost categories internally (across brands and countries) as well as externally to answer following questions:
- What is the best performing brand or country (in terms of budget versus output/value), and what can we learn from it – for example if the media budget for a brand is smaller for the same reach, what is the reason for this and can this practice be shared across the firm
- How does this categorisation compare to industry best practice?
- Is the budget allocation across the categories optimal – for example, can the budget for online media spend be increased and that for events be reduced for a larger reach.
The toughest decisions however are around the need for a budget or reducing the budget based on returns on investment type calculation. It is precisely these choices that determine how far your company extends ZBB and how much you change your corporate culture. As an example, in an extreme cost reduction scenario, you may completely remove the events budget. However, in another extreme you may choose only to adjust budget for event giveaways marginally. For each of these scenarios, it is visibility that creates the ability to make a choice best suited to your company’s culture and values.
Find out more about ZBB and what makes for its successful implementation in our next blog.