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Who’s Still Afraid of Zero-Based Budgeting?

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Sep 8th 2016
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In the past, and even today, many of you would answer in the affirmative. But there’s a new brand of zero-based budgeting (ZBB) out there and it’s a lot less scary.

Instead of zero-basing the budget for everything, every year for your clients, you can help themrotate areas of focus based on benchmarking and preassessment. The result is a process that is less draconian, time-consuming, or disruptive, and that focuses on aligning cost savings with strategic objectives.

In a conversation with a finance director and veteran ZBB professional, I found that a lot of the new popularity of ZBB has to do with the attention the press has paid to successful ZBB efforts. This executive said ZBB has become much more popular, as companies like the Brazilian private-equity firm 3G and activist shareholders at organizations like Mondelēz International have publicly endorsed it and instituted it throughout their organizations.

But there’s more to it than just free press. The economic and competitive environment has made it clear to many companies that something needs to happen with regard to cost-cutting. According to Peter Hinrichs, vice president of financial planning and analysis (FP&A) and ZBB at Dollar General, who previously headed the ZBB effort at Mondelēz International, it’s not that FP&A had been silent on cost reduction before.Cost management needs to be more than a one-time, short-term, and relatively arbitrary effort. “To do it differently, you needed to make it a sustainable effort,” he said.

So, What is ZBB 2.0?

ZBB of the past meant starting the entire annual budget from scratch every year. That basic concept still applies, but with a new twist.

ZBB 2.0:

  • Doesn’t get applied to every item of the budget every budget cycle every year.
  • Relies on ongoing focus on budget savings to make every year’s cycle a little shorter.
  • Places a big emphasis on making smart use of the resulting savings.

According to Brad McCreedy, a partner with KPMG, clients apply ZBB as part of a more hybrid approach, best applied to operational expenses and used in conjunction with other budget methods, such as driver-based budgeting. ZBB is typically not repeated every year, and if it is, the expenses that it is applied to are rotated from year to year.

“We believe youshould choose a portion ofexpenses that have been identified that could lead to cost savings, and when these savings are realized, move to the next subset of expenses,” he said.

The initial effort in ZBB is getting one’s house in order and getting the cost centers aligned with authority, responsibility, and accountability. But onceyou can fix that for your clients and have a good process and incentive program in place, ZBB creates an environment where they can move faster and more efficiently.

According to Mark Hopkins, a principal with Deloitte, “ZBB gives you a line of sight into how things are controlled, so you can really look at the cost of new revenue.” It ultimately delivers what every finance professional wants: more flexible budgeting and forecasting.

Deloitte doesn’t recommend companies redo the budget from scratch every year either. Instead, it advises a deep dive on a rotating basis and a focus on areas of concern, or areas that experience volatility or change where the cost structure might have been affected.

“This way, you actually increase profitability and direct the budgeting and FP&A resources to the right areas,” said Hopkins’ colleague, Rick Ferraro, a senior manager. “More often than not, this allows you to more actively manage your resources.”

But perhaps what really sets ZBB 2.0 apart is the fact that it ensures that there’s a proper governance structure in placefor your clients to make decisions about how to reinvest the freed-up capital.

According to Kris Timmermans, senior managing director at Accenture Strategy, that structure involves a couple of dimensions:

1. At the budget level. Traditionally, managers have liked to play with their budgets. For instance, if they didn’t use up all the budget on legal, they might have moved some of it to cover facilities’ costs. ZBB creates a different structure where different senior executives look after specific budget areas. This governance structure turns the light on (i.e., you can’t just move the savings around).

2. At the regional and global level. Once the savings are generated at the budget level, those savings are pulled on a regional or even global basis into a fund that’s governed by a top-level growth committee at the most senior executive level. It is their job to decide how to deploy the savings.

Five Implementation Tips

ZBB is not for everyone. But because it’s morphing into a less draconian effort, it’s growing in popularity and becoming more manageable for more organizations. Here are five lessons experts and practitioners offer if you’re interested in adopting ZBB 2.0for your clients:

1. Assess organizational readiness. Figure out whether the company is ready for the methodology. That means assessing the technology, people, and process components.

2. Assemble a visibility team. This team’s role is to create the forensic visibility into how a company’s money is being spent. They need to work with finance, procurement, and others – and call on IT expertise – to gain access to the transactional data and define a common taxonomy for the entire company.

3. Get executive sponsorship. It’s important to assign a senior leader to each cost category, such as professional services and office supplies. Then, engage the organization in analyzing what thespend for each cost should be using benchmarking and other approaches.

4. Get top-level buy-in. ZBB is not just a finance or procurement initiative. The idea is to create a culture where people start to behave like they’re spending their own money.

5. Create a positive brand. Finally, a key aspect to success is creating a positive brand so that people don’t get a misguided perception of what FP&A is trying to achieve. You should make it clear that it’s not a slash-and-burn strategy and brand it in a positive light that’s consistent with the mission and goals of the organization – for example, the ability to invest in higher-growth areas.

Conclusion

ZBB needs to be embedded directly into the DNA of the planning, reporting and analysis, and management decision-making processes. According to Philip Peck, vice president of finance transformation at Pelton, this helps institutionalize ZBB principles into the fabric of the organization, even to the extent of aligning incentives to support these goals.

In addition, Peck points out, like any transformational effort, FP&A has to ensure an ongoing management commitment and a repetitive and positive communication cadence around how ZBB helps the company improve how it allocates resources rather than just the perception of reducing headcount.

Peck insists there’s a big role for management in internal support and advocacy to ensure ZBB is not viewed as a “grim reaper” exercise but as part of a holistic performance management platform for the organization at large to help it grow, prosper, and deliver sustainable success.

Nilly Essaides will be presenting the session, How to Shorten the Budget Process & Merge Financial and Strategic Planning, at Accountex 2016Nov. 15-18 in Las Vegas. The original post appeared on the Sleeter Group blog. AccountingWEB and Accountex have partnered to bring you this content as we share a belief in the furtherment of the profession through greater insights.

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