Classics never go out of style. They endure.
Consider the sports cars of the 1960s. Many evolved over the years and held their appeal. The sporty MINI — a three-time winner of the Monte Carlo Rally back then, now manufactured by BMW — resembles early models of the car. But under the hood, it is nothing like them.
So it is with zero-based budgeting, or ZBB, a classic business process that has gained a “new edge” as it evolved in recent years from a painful activity that management undertook only during times of economic duress to, at many companies, an ongoing, vital process. That shift was borne out of companies’ desire to sustain the benefits achieved through the strategic application of ZBB.
Several reasons exist for ZBB’s relevance today. First, the economy remains volatile, and in times of volatility, profitable companies with a strong competitive edge are best positioned to innovate, grow, and beat the competition. ZBB helps companies identify resources that are not generating an adequate return and encourages strategic redeployment of those funds in order to achieve business objectives and strengthen companies’ market positions. And in today’s era of digital disruption, many use those funds to invest in new technologies and capabilities that can help them out-compete traditional and nontraditional, digitally enabled competitors.
Related but separate, M&A activity is prevalent. Following deals, companies can use ZBB to make more efficient use of resources, and through its application, funds are identified that can be used to help propel the newly merged business forward.
While finance executives and senior management in commercial and public sectors have applied zero-based budgeting over the decades, it has generally lacked the rigor required to maintain cost-management discipline over the long term because it was not an ongoing process. And strategies that drove cost cutting were not necessarily connected with strategies for where and how to reinvest the funds to help the enterprise grow.
Today’s ZBB, however, like the MINI, has been re-engineered to become an ongoing process. Consequently, companies are drawn to it not just because they want to shrink this year’s budget. Nor is it merely a matter of post-merger right-sizing and showing the “Street” how much value they can quickly realize.
Rather, companies that adopt ZBB are investing in it for the long haul. They are applying advanced forms of procurement to change spending behaviors and negotiate better pricing based on an enterprise-wide view of spending. Rather than just whittling away at costs piecemeal and tackling overhead, they use ZBB to focus resources on core goals, shifting funds from products or programs that aren’t productive to activities that truly drive growth.
Management across the business gets involved as expenditures and programs are evaluated at a forensic level. Finance and procurement work together as management examines who spends how much on what. Is the investment maximizing the return?
By going through this process, management across business units, categories, functions, and geographies buys into the budget. Wasteful spending, redundant processes, bureaucracy, and unproductive products and services are surgically removed, freeing up resources that can be used elsewhere to fuel innovation and growth. In the process, recognizing that there can be differences from industry to industry, a company may identify perhaps as much as a third of costs that can be reallocated.
Take, for example, global consumer goods company Mondelez International. Using ZBB, it has freed up capacity to fuel growth. The company was able to save $350 million in selling, general, and administrative (SG&A) expenses in fiscal-year 2014, and projected three-year savings of $1.1 billion. It now aims to increase operating margins from 12% in 2013 to 14-16% by 2016. It enjoyed three consecutive quarters of adjusted margin expansion through the third quarter of 2014, with adjusted operating income (OI) margin up 140 basis points to 13.6% in the third quarter. These improved margins are helping Mondelez step up investment in production facilities, especially in emerging markets. In 2014, it announced new plants in Bahrain and India, and an expansion of factories in Turkey and Hungary, as well as Ireland, the UK and the United States.
ZBB converts what may have been a culture of spend to one of accountability. Cost management becomes a continuous process, as it fosters teamwork around budgetary goals. People are held accountable for categories of spend, and they are encouraged to treat the company’s money like their own so that they question the value of each expense.
Useful in profitable and difficult economic times, ZBB drives behavioral change at all levels of an organization, leading employees to regularly question the need to spend. Achieving that result requires ambition and a massive change management effort. Employee communication that explains the need for the new approach to spending is paramount.
Although ZBB is not an easy process, requiring concerted effort, it helps companies reduce costs and drive growth. It’s a new classic that drives benefits that speak for themselves as they help companies compete and grow.
Kris Timmermans is senior managing director of Accenture Strategy, Operations. He works with companies to adopt ZBB and helps them to build operations strategies and digital supply networks to increase efficiency and profitability.