Takeaways from ZBB Successes & Failures Globally
A significant decrease in the use of Zero-Based Budgeting has occurred in recent years in corporate finance across the different sectors and industries. However, this method of budgeting still provides utility for a variety of corporate circumstances, and it would behoove most organizations to cultivate greater proficiency in this effective method of budgeting. When an organization needs a more structured approach to cost management, and is pursuing tactical improvements with cost savings targets of less than 10%, zero based budgeting can prove to be highly effective. However, doing this requires a willingness to contend with the various challenges of implementation, and a strategic approach to deal with the complexity that can come with zero-based budgeting. Maximizing the use of this budgeting method involves understanding and proficiency in zero-based budgeting’s definition, its use worldwide, the fundamentals of the technique, and making additional investments in training and technology, communication, and effective change management.
Defining Zero-Based Budgeting
Zero Based Budgeting (ZBB) was conceived in the 1970s by Peter Pyhrr, an accounting manager at Texas Instruments. It is a budgeting approach that involves creating a new budget from the ground up every time (i.e., starting from “zero”), instead of commencing the process with the previous period’s budget and adjusting it as necessary. In theory, this forces decision makers to constantly look at the business with fresh eyes, liberated from the limitations of past (and perhaps irrelevant) targets and assumptions. ZBB is based upon budgetary judgments that are made for each budget line based on projected return and alignment with the most up to date and relevant strategic goals.
ZBB Usage Trends Differ Significantly Across the World
On average, according to Deloitte’s recent global cost management survey, ZBB use is anticipated to decrease from 13% to 10% across regions, a real decline of 23% (survey participants were asked whether they used ZBB in the past couple years, and then whether they plan to use ZBB in the next 2 years).
However, usage trends vary significantly from region to region. Zero-based budgeting use is expected to decrease significantly both in America (from 16% to 7%, a real decline of 56%) and in Latin America (from 15% to 9%, a true decline of 40%). However, in Europe and the Asia-Pacific region, ZBB use is expected to remain steady at 7% and 16%, respectively.
Additional findings on ZBB use across the world from the aforementioned survey include:
41% of respondents who conduct ZBB reported targets above 20%. Yet, only 23% of respondents not conducting ZBB reported pursuing those same targets
Success & Misapplication Stories in ZBB
Fortunately for ZBB users, this strategy appears to yield relatively greater success in reaching their cost targets. Sixty-three percent of respondents across regions in the aforementioned survey, who elected to not utilize ZBB did not meet their cost targets, whereas the same holds true for 58% of the organizations and teams that did use ZBB. Although ZBB users in the US reported higher cost program failure rates than non-ZBB users (65% vs. 57%), in all other parts of the world, the ZBB users’ failure rate proved to be significantly lower than for non-ZBB users (57% failure rate vs. 68% in Latin America; 52% vs. 56% in Europe; and 60% vs. 71% in the Asia Pacific).
However, companies using ZBB also tend to report greater obstacles to effective cost management, which suggests ZBB may be more difficult to implement and use than other cost management methods. Two barriers that ZBB users rate particularly high are “weak/unclear business case” (42%t vs. 25% for non-ZBB users) and “poorly designed tracking and reporting” (43% vs. 23% for non-ZBB users)
In the US, high-cost targets and high failure rates suggest that organizations could be misapplying zero-based budgeting, by using a tactical approach to pursue aggressive targets that likely require strategic cost actions. In Brazil, where ZBB first rose to top prominence, declining usage seems to have been driven by implementation challenges and obstacles.
The rate of ZBB use is anticipated to remain constant in the Asia Pacific region, except in China, where it is expected to rise. This expected rise is perhaps due to lower implementation barriers and lower failure rates.
In Europe, the use rate of zero-based budgeting is relatively low but is also expected to remain flat. Cost targets in the region are much less aggressive than elsewhere; also, structured approaches to cost management are much less common. In this environment, ZBB—as a structured approach—may be appealing to some companies simply because it is better than nothing.
A key takeaway is that while zero-based budgeting use seems to be fading globally, some companies can still make some serious use of it, particularly if they are currently in need of a more structured approach to cost management, are pursuing tactical improvements with cost savings targets of less than 10%, and are able and willing to contend with the additional implementation complexity and obstacles that can come with ZBB by making the necessary investments in training, communication, technology, and change management.
Improving ZBB Effectiveness Via Digital Zero-Based Budgeting
For companies interested in using the zero-based budgeting process, taking a digital-oriented approach can make the process simplified, more efficient and more effective.
Key enhancements include:
Using the most effective technologies: These tools reduce the level of manual processing, accelerating the ZBB effort and helping to identify hidden savings opportunities.
Double down on strategic drivers: This concentration reduces the change management challenge of ZBB while delivering improvements in the areas that are the most significant.
Address the problem from all corners: Supplementing ZBB’s standard bottom-up approach with a top-down perspective reduces the required level of detail and paves the way for simpler ZBB execution.