4 Reasons That Will Convince You of Zero Based Spending
February 21, 2020
With a continuing competitive threat of new entrants, companies have to stay vigilant by spending their money wisely. In this article, I will explain how Zero Based Spending can aid you in cutting back expenses so that your company can invest in growth opportunities.
As a company you are always on the lookout for new ways to efficiently invest your money in the best opportunities and to cut back on expenses. With the Zero Based Spending (also known as Zero Based Budgeting or ZBB) methodology you are ensured that your (indirect) spend is visible and accounted for.
Imagine paying five euros per hour for a car park. You might consider that price as being too high, or maybe you would rather not pay for something as basic as parking your car. The problem here is that the parking of your car does not seem to bring you much value nor does it help you to receive value in the future. Even though the parking lot has to meet certain minimum requirements (proximity to your final destination, safety), you would rather spend your money on something that brings value to you. Like a new pair of jeans or dinner in your favorite burger bar.
A parallel can be found for companies: why should they spend a lot of money on items that do not help them in either improving their service or reaching their strategic objectives? Zero Based Spending (ZBS) helps to identify this “unproductive” money and helps to redirect these funds to where they do add value. The ZBS methodology has proven itself multiple times: companies who performed Zero Based Spending between 2008 and 2014 demonstrated EBITDA increases of 50% compared to the 39% of non- ZBS peer companies1. Most of these successes have been achieved in the Consumer Goods Industry. An example is Mondeléz, who achieved savings of $350 million in SG&A in 2014 with $1.1 billion expected over three years2. Another example is Burger King, which has increased its operating margin from 7.5% to 20.4% in the three years following its Zero Based Spending implementation3. In this article, I will share four reasons that will convince you of the power of Zero Based Spending.
The successes of ZBS in the Consumer Goods industry will probably make you wonder whether the methodology could work for your company as well. Below you will find four reasons why the ZBS method is the way to go!
1. Turning Unproductive Money Into Productive Money
With competitive pressures from incumbents rising, and the ever-increasing threat of new entrants, companies have to stay vigilant at all times as where they are spending their money and invest wisely in new growth opportunities. Think about the Utilities industry, where recent market conditions, such as declining oil prices and high operating expenditures, have motivated companies to focus on long term strategic cost reduction. Similarly, the banking industry is being confronted with regulatory pressures, digitization and changing customer preferences. Zero Based Spending is able to turn unproductive money into productive money, an activity that can be undertaken in every industry.
"Zero Based Spending is able to turn unproductive money into productive money"
2. Adapting Zero Based Spending to Different Industries
The Zero-Based Spending methodology can be easily applied across all different industries. Of course, some cost categories might be bigger or more impactful for one industry than for another, leading to slightly customized cost categories and a different focus. Whereas Sales and Marketing are cost categories of large focus within Consumer Goods companies, ZBS within Life Sciences focuses mostly on packaging and supplies related costs. Within the Telecom industry, the main cost areas are network costs and customer service, whereas Zero Based Spending within Banking will focus mostly on Information Technology and Banking Operations costs.
To determine the customized focus, both the relative shares of these cost categories – i.e. as a percentage of total revenue – for the specific company as well as the generally expected savings for that cost category will have to be taken into account. The relative share of the cost category might differ per industry. Other components of ZBS, such as internal benchmarking, and the definition of value targeting opportunities, can be applied to different industries without major adjustments.
3. Savings Driven by Ambitions
The expected savings that the Zero Based Spending methodology will bring depends on the ambition level of the specific company. Not all companies like to be as aggressive in driving down costs, as they are concerned with employee engagement or running higher risk to slow down growth. It is important to keep in mind that the goal of ZBS is not to relentlessly cut costs, but to re-think how money is spent and place the money where it works best. Zero Based Spending creates the transparency, and then shows the options - the menu - on how to spend it. It is up to the company to decide which savings opportunities should be pursued – and which ones not.
4. Zero Based Spending: Driving Value Across Industries
The ZBS methodology helps companies in identifying unproductive funds and investing these funds in serving their customers better and reaching their strategic goals. The method can be easily applied to different industries, as transforming unproductive money to productive money is beneficial in all industries. The focus on the different cost categories however, will differ per industry. To determine this focus, it is important to investigate and understand the relative share of the cost categories as well as the expected savings per cost category. The expected savings will mostly depend on the ambition level of the company, as the objective of the program is to help spend money wisely. The Zero Based Spending methodology can therefore be used in any type of industry, for any savings ambition level, and will thus continue to deliver value for many years to come.