Many of the Fortune 500 companies have adopted this decades-old methodology for their budgeting needs post-COVID, and the response has been phenomenal.
While some are still on their realisation journey, some organizations have seen rapid changes in their ROI with little to no changes to operations, labor, or growth strategy.
What is this methodology, why is it so effective, and how does it manage to boost returns? Let’s find out.
Zero-based budgeting (ZBB) Explained
Zero-based budgeting (ZBB), unlike traditional budgeting, is the method of creating a budget from scratch. It allows organizations to revisit their strategies each year and ask themselves for what is still relevant.
Zero-based budgeting (ZBB) is a budgeting approach that involves developing a new budget from scratch every time (i.e., starting from “zero”), versus starting with the previous period’s budget and adjusting it as needed. In theory, this forces decision-makers to constantly look at the business with fresh eyes, free from the limitations of past assumptions and targets.
In traditional budgeting, the narrative of optimising costs and driving increased revenue has always been one thing – cut down on cost centers. IT is often considered to be a heavy cost center.
Instead of embracing new technological advancements and helping IT to fuel growth, IT is perceived as the go-to line item to cut down on. This is known as a defensive technique that neither fosters growth nor does it allow any breathing space for processes to innovate or flex.
ZBB does things differently. It acknowledges all spends regardless of their volume and value. And it takes into account all the cash cows (profit centers) and checks if previous allotments are still relevant today.
While some organisations are looking to cut costs with ZBB, some want to use it to fund innovation and growth. In Kraft Heinz, more than one-third of the money saved was allocated to new sales initiatives and other customer-facing activities.
It is widely evident that fast-growing innovators are embracing ZBB to ensure they’re directing their capital to areas that can best enable growth.
The adoption keeps growing. Depending on the scale and business objective of organisations, ZBB is currently being used to:
· Challenge and reason the funding of the support drivers such as procurement, supply chain, and travel and expense management that are often assumed to be stagnant and less leaky during traditional budgeting.
· Challenge legacy processes that are either deemed sacred or are untouched
· Challenge micro-funded projects or processes which are seen as having a negligible effect on the overall budget
· Improve visibility and transparency into costs
· Create an atmosphere of accountability that links costs to business-drivers
· Enable executives from across the enterprise to participate more effectively in building an efficient budget that promotes long-term growth and financial sustainability
A 2017 article by Reuters found that the number of US companies using zero-based budgeting is “surging as they turn their spending habits upside down to boost profits and re-invest in their businesses.”
Among the major companies mentioned were food companies Campbell Soup Co., Kellogg Co. and Mondelez International Ltd. Apart from these, Cheniere Energy Inc., Huntington Bancshares Inc., Baxter International Inc., and Ford Motor Co. were reported to be embracing the concept, too.
Meanwhile, a Wall Street Journal report shows that about 300 large global companies in a broad range of industries are now using ZBB. A survey of some of those companies found that their use of ZBB in 2017 had increased more than 50 percent from the prior year, and that the companies are saving, on an average, more than $250 million in the first year of implementing their programs.
Technology enables ZBB
Cloud has been one of the biggest enablers of ZBB. With cloud adoption increasing world-wide, CFOs across the globe have felt the need to leverage cloud capabilities to its full potential.
Cloud platforms that offer financial accounting solutions have the ability to welcome and embrace new strategies designed by the organization.
For instance, OEMs such as Oracle offer a subscription-based planning and budgeting solution built on Cloud. These solutions use flexible and best-in-class architecture that allows them to deliver instant value and greater productivity across all lines of business of an enterprise.
Cloud platforms allow seamless implementation of ZBB strategy into the system without having any impact on current processes. It enables the workforce to calculate and insert precise budget inputs using templates that mandate bottom-up details and restrict access to prior-year budgets that could be used as a starting point. They have variety of tools that facilitate cost analytics, and workflow tools that can fast-track the review and approval processes.
Technological advancements can also define ZBB onto templates for easy access and future wide-spread adoption. The OEMs can analyse ZBB imperatives implemented by existing organizations and embed it into their systems. It will help CFOs to understand new ZBB techniques and pre-requisites, and give them a head-start on their budgeting.
Advancements in AI, ML and analytics can help organizations to experiment with different budget scenarios and hypothesis, thereby, creating a budget that best suits the organizational goals and strategy.
Cloud also enables organisations to connect their data islands and bring them together. It acts as a single pane of glass for other key personnel and process drivers such as compliance, regulators, and investors.
It empowers them with access to the data with complete transparency and facilitates space for real-time feedback. Properly executed, the planning of zero-based budgeting can prove to be a valuable strategic step that helps organizations to make smarter decisions.
ZBB shouldn’t be perceived as a tool that can cut costs and help organisations save, but rather, it should be looked at as a tool to design a financial strategy that challenges legacy process, redirects investments to potential growth sectors, and aids innovation.
It enables the organization to work fearlessly towards its objectives, without worrying about traditional budget-cuts across processes and workforce. It aims at empowering teams to embrace new opportunities, experiment with innovative technologies, and foster organization-wide growth with reason. ZBB, with the help of cloud technology, can really shape organizations to build economies of scale.
Vice President & Head – Practices, Clover Infotech