Zero-Based Budgeting is on the Rise

More companies are biting the bullet and going through the painful process of realigning their culture to support a transformation to Zero-Based Budgeting, writes CFO.com.

Zero-based budgeting, where an organisation creates a new budget every year, without basing it on previous budgets, has existed as a concept for a few decades, but has only become popular in recent years, according to research by Accenture – including interviews carried out with 85 of the world’s largest companies that have gone zero-based.

Only two of those companies initiated zero-based budgeting (ZBB) before 2011. “Understanding and momentum started building” between then and 2013. And from 2014 through 2017, the proportion of the surveyed companies that adopted ZBB increased by an average of 57% per year.

On average, a 15% cumulative annual cost reduction during their ZBB project implementation period (typically about 2.5 years), compared with a baseline (usually, spending in the previous year). That translated to average bottom-line savings of more than $260 million. They most often redirected the savings into growth initiatives (52%), digital technologies (31%), and the bottom line (15%).

The companies pursued ZBB for different reasons: 96% of the survey participants got started to improve profitability; 48% were influenced by competition; and 40% were driven by concerns over slow growth.

Only 14% said mergers/acquisitions were a driver. “That flies in the face of common, but flawed, wisdom that says companies typically pursue ZBB in crisis mode in an M&A scenario to improve integration, speed results, and realize the integration business case.”

No two ZBB programs look exactly alike, the authors write, but there are trends in how companies implement them.

The surveyed companies don’t necessarily apply ZBB across the full range of budgeting scenarios, although 92% of them use it for general and administrative expenses. Lower proportions of the companies apply it to sales and marketing (52%), direct and indirect labor (43%), and logistics and cost of goods sold (42%).

Geographically, companies tend to apply ZBB on a worldwide basis (45%) more often than on an in-country (37%) or regional (18%) basis. Similarly, more than half (55%) of the surveyed companies apply ZBB corporate-wide, compared with 18% for function-specific and 17% for business-specific application, while 13% employ it in both of the latter two ways.

Companies were about equally split between launching it as a full rollout (43%) and a staggered rollout (45%), while only 11% started off with a pilot program.

According to the report, the hardest obstacles to overcome were cultural buy-in (67%), change management (41%), and data visibility (33%).

“The hardest things to do are also the most important,” the report says. “Culture and change are what make ZBB stick. Unlike traditional techniques that use a cut-the-fat and gain-it-back approach, ZBB is an enterprise transformation. It requires big changes in organizational thinking and doing so that the ‘weight’ never comes back.”

For the full article, visit CFO.com.