Most companies today base their cost management approaches on exactly that—setting budgets based on what happened last year. Against a backdrop of increasing volatility, it’s time to reimagine cost structures based on what’s needed in this new, disruptive environment. Basing resource demand on what’s needed now rather than on last year’s performance frees up capital that can then be used in ways that will have the most impact on building innovation and fueling sustainable growth.
What is zero-based budgeting?
Zero-based budgeting (ZBB) is an open and transparent way of creating a budget, resulting in important insights into consumption. Budgeting from zero each year helps to remove unnecessary cost and create a detailed forecast. Savings can be earmarked and assigned to activities that ultimately boost growth.
It requires justifying each budget item's need or cost, while respecting strict policies and top-down targets set by the cost category owners. This level of detail allows for useful internal and external benchmarking.
Key findings of zero-based budgeting research
A zero-based budgeting effort can fuel growth by removing waste and freeing up capital that can then be turned to more lucrative activities. At its core then, zero-based budgeting is about agility and getting companies to run in a more cost-efficient way to make them more competitive. Piecemeal approaches that focus on overhead and cost of goods sold is a common mistake that occurs during cost-cutting.
These efforts only scratch the surface and risk causing the company to lose valuable, differentiating capabilities. Companies need to focus on their core goals; funds that are not working toward those goals should be shifted into activities that drive growth. Indeed, without zero-based budgeting, it's likely the money needed to grow won’t be there.
How to utilize zero-based budgeting
Achieving profitable and sustainable growth through zero-based budgeting hinges on a few things: having an effective blend of cultural change, business process improvement and technology deployment—underpinned by a deep understanding of industry dynamics.
Companies need to create better forensic visibility into spending, and then make savings sustainable through better accountability, process improvements and culture change. And most importantly, organizations should closely link spending reduction with their strategic growth plans.
Strategic cost reduction can only be successful if the savings are reinvested in areas of the company to drive growth, innovation, improved productivity and better customer experiences.