Managing costs is still one of the biggest Achilles’ heels of organisations in 2023. Yes, we have better systems, we promote strategic thinking, we’ve optimised processes, we’re trying to create transparency, accountability and openness to change. Yet, most budgeting is still done based on historical allocations with all its sub-optimisation, sandbagging, transformational inertia, personal preferences and strategic misfit. I know it, you know it, we all know it: We base our decisions largely on history rather than efficiency and necessity.
I’ve worked with strategic cost transformation for many years. In times of growth and prosperity, it receives less attention; in times of crisis it goes to the very top of the strategic agenda – as proven by Deloitte’s latest global CFO Signals where cost management was the number one priority among more than half of the respondents[i]. In 2023, for many organisations, radically managing cost is THE driver for futureproofing the organisation. For some, it’s a matter of survival.
The idea of starting from zero
The idea of ‘Zero-Based Budgeting’ has been going back and forward for several decades. It was U.S. President Jimmy Carter who, in the 1970s, first promised to reform the federal budgeting system using ZBB and its basic principle that no item is automatically included in the next budget, but must be reviewed and justified in order to receive new funding. It didn’t work in the practical functioning of a government system back then, but the idea was picked up by many companies and public organisations.
ZBB is a budgeting process that allocates funding based entirely on efficiency and necessity. As opposed to traditional budgeting, no item is automatically included in the next budget. In ZBB, budgeters review every programme and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding.
Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general and administrative costs; marketing costs; variable distribution; or cost of goods sold. When successful, ZBB produces radical savings and liberates organisations from entrenched departments, unprofitable activities and worn-out assumptions.
Dream or nightmare?
Of course completing a full ZBB cycle would be both challenging and risky for most organisations where the thought of rebuilding the company budget from the ground up would be a nightmare. For most organisations, wiping the financial slate clean and starting from scratch would be a last resort in a worst-case scenario, not really an option to be considered under normal circumstances.
Still, the ZBB philosophy offers appealing possibilities for reducing costs while bringing additional value in the form of operational efficiency. ZBB may reduce SG&A costs by up to 25 percent within six months. ZBB can also help companies confront conventional thinking and resource allocations by challenging every line item and assumption, resulting in a budget that is much more aligned with the strategy and future ambitions.
Even just adapting some of the principles of ZBB can be a step towards eliminating wasted and unproductive spending while at the same time creating a cost-conscious culture that spans across departments. Here are four of the most obvious advantages:
Completing a full ZBB cycle can be challenging and risky for most organisations, especially for departments with intangible outputs. However, ZBB components and theory may be necessary under specific circumstances, especially in times of recession when both rapid and strategic cost reduction is needed. In reality, ZBB typically begins with defining savings or efficiency goals and mobilising decision makers and teams to tackle specific cost areas. Leaders then evaluate how different cost levers impact productivity, cost avoidance or other performance measurements. ROI guidelines are set for each category and validated with cost owners.
However, the compelling aspect of ZBB is its founding idea: a budgeting process that allocates funding based on efficiency and necessity rather than the budget history. More than a budgeting methodology, ZBB is a philosophy of cost justification and frequent monitoring that enables spend transparency at a granular level and gives companies the agility to adjust to market changes.
By forcing justification of every expenditure every year, companies can radically improve operational efficiency and accountability. In this sense, ZBB is not only a mechanism for reducing costs, but also a driving force in transforming a business into a more transparent, differentiated, agile, adaptable and results-oriented organisation.
As a part of the Strategy & Operations practice Tore has worked with analysis, development and implementation of operational strategies. Tore has deep experience with aligning business models to changing market demands through optimisation of business processes and aligning systems, organisation and governance accordingly. He has industry experience from manufacturing, transportation, consumer products and energy. His main focus is on on the operational core processes but he also covers administrative support processes. As a program manager Tore has been leading transformation projects for international clients heading multiple parallel projects and reporting directly to executive committee members. His responsibilities cover everything from initiating assessments, identifying opportunities for improvement to building business cases and following up by designing solutions and driving teams through implementation.