After first making a splash in the 1970s and then fading in popularity over the ensuing decades, zero-based budgeting (ZBB) is making a comeback. At its best, ZBB brings remarkable spending visibility, helps achieve relentless cost discipline, encourages managers to reallocate resources in an agile fashion, and unleashes a culture of continuous improvement. Those benefits apply to organizations in all stages of the corporate cycle, from mature (and often profitable) companies still budgeting under “same old, same old” methodologies to more nimble, post-transformation firms trying not to slide back to their former “business as usual.”
To have maximal impact, ZBB needs to be more than just a rote implementation of the process’s textbook definition; namely, to build a completely new budget each year, function by function and project by project, by starting from a zero base (rather than by starting from the prior year’s expenses). Fortunately, advances in understanding the psychology behind ZBB; the availability of newer, digital-based tools; and the power of singular purpose within an organization—including the right messaging from senior leaders and appropriate incentives to walk the talk—are making it easier than ever to bring ZBB back to the fore, and to sustain its improvements for the long term.
ZBB: Why now?
ZBB is designed to scrutinize every dollar. In a low-growth environment, it’s easy to see why keeping costs down would be especially attractive. But the fundamentals of P’s & L’s have largely been ever thus, and today’s ZBB renaissance comes from more than just typical margin forces at work. In fact, the current climate of disruption is unique because it has brought a heightened scrutiny about which business models make the most sense (even when that means a dramatic shift from the company’s traditional focus) and how resources should be allocated to best effect. Decisions must be made faster, results are expected more rapidly, and performance details are laid bare to a broader audience than ever before.
Fortunately, today’s challenges have brought new advances to meet them. That, too, represents a change from the “same old, same old.” For many years, ZBB was tedious and time-consuming—certainly, more difficult than rules of thumb such as “last year’s budget plus or minus” some percent. Let’s face it: budgeting can be a chore, and finance departments at large corporations must collect, collate, review, and revise budgets from hundreds—if not thousands—of cost centers. That can be frustrating both to the businesses, which rely on the allocated capital, and, even more, for the workers forced to align by hand a vast array of differently formatted spend requests. Ironically, the introduction of user-friendly spreadsheet software actually exacerbated the problem. Familiar desktop-spreadsheet software’s versatility and flexibility simply does not scale well and enables different managers to produce an almost infinite variety of templates, which make aggregating them an even more manual and error-prone ordeal.
New digital tools, however, now readily available commercially, virtually eliminate this pain point. Effective cloud-based digital-budgeting products, while no less intuitive than offline spreadsheets, are programmed to compel disciplined data entry. This forces managers to align their inputs to formats that synthesize instantly. The result is a budgeting godsend. At one consumer-packaged-goods (CPG) company, for example, one globally deployed cloud-based tool replaced more than 10,000 offline spreadsheets, vastly freeing up the time and capacity of the finance function. The tools—fast, scalable, and easy to deploy and configure—also helped the company integrate business rules and data validation into the budget-planning process, and enabled different cuts of financial data suitable for different purposes. Perhaps most important, the advances made finance assumptions more clear, fostering a consistent approach throughout the organization. That helped everybody to work from the same ZBB playbook.
Turning ‘why’ into ‘how to’
It’s important to recognize why ZBB is significant again, and it’s encouraging to know that digital advances are opening new possibilities. But actually pulling off a transition to ZBB—and better yet, sustaining the shift—requires a deeper understanding of how ZBB can gain acceptance, and what leaders must do to keep it the new normal.
ZBB and how our brains work
ZBB is at its core about building a culture of cost and performance management. As such, it works best when it accords with how people think and behave. In our experience, managers of effective ZBB implementations often succeed because they harness and channel employees’ own hardwired behavior. Sometimes, the secret of success may seem a mystery—but if we understand the will behind the way, it doesn’t have to be.
One normal human bias is loss aversion, also known as “the endowment effect.” This phenomenon—our ingrained preference to avoid losses more than to acquire equivalent gains—is deeply rooted in human evolution. For example, losing one’s daily food ration could lead to illness or death, but gaining one additional ration will have only limited benefits. Our default psychological setting thus is to guard what we need, rather than to gamble on acquiring something we may not.