As a financial planning and analysis professional with a healthy level of intellectual and professional curiosity, I have watched various bloggers and marketers write about zero-based budgeting for the past year to see whether ZBB is a real trend or hype. Here is what I have found:
- The overall trend is up: In a 2016 Bain survey of 406 North American companies, 38 percent intended to use ZBB soon, up from 10 percent in 2014.
- ZBB is finding success in M&A activity: Buyout firm 3G applied ZBB to Kraft-Heinz immediately after buying and merging the businesses. The combined entity now boasts the best profitability in its sector (6.3 percent versus 1.1 percent for consumer discretionary), which has spurred rivals to adopt similar tactics to keep up.
- ZBB is finding success in marketing: Diageo CEO Ivan Menezes credits ZBB with helping to build a “culture of driving out cost to reinvest more in the business [which] has been critical in the turnaround of Europe’s performance. Europe’s savings in overheads and marketing spend has funded investment in route to consumer, reserve and innovation… We’ve significantly reduced the number of media agencies we use, non-working spend is now lower and point-of-sale has been rationalized into a single platform.”
- ZBB is finding success on the cost side: Verizon announced it will apply ZBB and save $10 billion over the next four years, according to a Wall Street Journal report. Its competitor, Sprint, completed a ZBB process a few years prior.
Management trends wash over corporations every few years. I don’t mean this disparagingly; shaking up companies with new thinking and approaches is a healthy process, and some elements of these programs always stay around after the initial push fades. There is intense pressure for CEOs to follow these trends, or explain to the investment community why they are not.
Marc Scott, a fund manager at the $1-billion American Century All-Cap Growth Fund said, “If a company uses zero-based budgeting, I have more confidence it can take out cost faster than peers who do not.” On the other side of the investment community, ZBB can assuage activist shareholders by showing that management is serious about spending capital wisely.
Interestingly, ZBB rose to prominence via the government—not the efficiency-obsessed private sector, when President Jimmy Carter applied it to the federal budget in 1970s. The idea was to start building the budget from a blank piece of paper to justify every dollar spent. However, it was found to be onerous and time consuming, and ZBB essentially died from exhaustion.
Like bomber jackets and vinyl records, what’s old is new; ZBB today is more streamlined as managers generally do not try to address the entire budget in each budget year, but rather pursue a “rotating spotlight” approach and delve into different business areas throughout the year. As an incentive, the businesses get to keep a portion of the money they save to reinvest. The ZBB examination typically is not confined to specific lines of the general ledger but are applied to business processes. This opens creative thinking to challenge how the company pursues its goals, and whether there is an opportunity to redesign processes.
If you are considering zero based budgeting for your organization, a good place to start is with the AFP Guide to Zero-based Budgeting 2.0: A New Take on an Old Method.
Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him atBLapidus@AllegianceAG.com.For additional insights on FP&A, subscribe to the AFP monthly newsletter, FP&A in Focus.