Zero-Based Budgeting – Keys to Success from Real ZBB Implementations
The origin of zero-based budgeting (ZBB) dates to 1960 and became popular in the ‘70s, including President Carter’s federal budget for 1979, only to virtually disappear. Until now.
In the past few years, ZBB has made a resurgence, driven by a push from venture capital and private equity firms who are looking to gain ROI on their investment. The same is true for companies looking to get the same ROI before they get acquired. However, it’s not just company’s cost-cutting for ROI, growing companies are using ZBB to redirect savings into initiatives that directly spur further growth.
Whatever the reason, ZBB is back in full force. However, before undergoing a ZBB project, there are key things you need to know and key mistakes to avoid. Based on our experience getting multiple large ZBB initiatives on track, we offer the following insight.
ZBB Is a Culture Change
ZBB is not a diet, it’s a lifestyle change. Recently, when discussing ZBB with a Fortune 500 customer, I was asked,
“Are we doing the budget that way again this year?
I thought it was only a one-year thing!”
Simply, you cannot do it one year, cut back and return to your old habits. ZBB must be a repeatable process and everyone must understand it is permanent. ZBB-thinking must become pervasive throughout your organization, from the top down. Your senior leadership must understand they should not ask just for a one or two-year commitment, they must ask all individuals who control budgets within your organization to think and live ZBB.
Other than the senior leadership who will see the bottom-line improvements and thus, bigger bonus checks, no one likes to have their budget cut. At the end of the day, ZBB is a budget-cutting process. Therefore, you must counteract the negative feelings a ZBB initiative can instill. Budget owners and all employees for that matter must see a direct relationship between what they are doing and job security, personal growth in the company, and overall company strength. This is a large organizational change and a shift in mindset. Include end-users in the implementation process so their voices are heard and they understand the impact this will have on the health of the organization in the long run. Your success implementing a zero-based budgeting process is completely dependent on your users, include employees early on to save headaches later. Without this enthusiasm for ZBB, the policy will wither, and old processes will return, much like the weight you lost on that last diet.
Don’t Overcomplicate Target Setting
A key tenant of ZBB is target setting. The target-setting process drives the savings you receive from your ZBB process. You can put a ton of effort into setting a three-year savings target and an intricate way to track it year over year, but you must be realistic. The demands on the business change so much over time that it makes sense to be agile and adjust the target on a regular basis. Savings can be tracked over multiple years, but don’t let that initial number dictate every decision going forward unless it truly makes sense given the current market.
Build a Sustainable Robust Solution
Once your processes are in place, you will need a planning solution that supports the policy and enables users to create their ZBB budgets, track their progress and execute the savings plan. This can be a daunting task, but with the right tools and proper understanding of how to build a solid ZBB-planning tool, you will be highly successful. The following are several keys to success we have learned from experience:
Business owners are constantly looking at their numbers and will request different ways to slice and dice the results. Instead of being reactive and creating a new report when a new demand comes to pass, build thorough and dynamic reports that will meet anticipated needs and provide flexibility to end-users. It will allow your end-users to better meet requirements and find additional insights. From an administrative perspective, it will free up considerable time in the long run for other requests.
A template can give you exactly what you want, but if it is not user friendly, it will not deliver the results you expect. Build to your end-user. This will help with adoption and forecast accuracy in the long run.
New models will be created during the next fiscal year’s budgeting process and it can be difficult to prepare the model if sustainable methods aren’t used. Make sure your reports’ filters and formulas are built in a dynamic way, enabling a smooth transition from one year to the next.
As you prepare for the budgeting process in the next year, be proactive with prepping the new year’s model. Do not plan to do everything last minute. Plan what changes you would like in the new model and schedule enough time to implement everything required before users enter the system. This will allow for a smoother planning process and decreased stress on the system administrators implementing changes.
Does master data change from year to year and need to be purged for budgeting? Do certain components become inactive over time and just take up system space? Whatever the case, have a plan in place on how these situations will be handled. Having master data that is inactive will affect performance in the long run, so you should know how to address it.
Your users are creative and will find ways to input negative spend in order to meet their expected target. Build a way to track these plugs and provide visibility. This will allow executives to get a clear picture of where they stand versus planned savings and will show users that they need to have a plan to meet the savings targets.
Now it is your turn. What do you think about ZBB and how it can more accurately keep your costs in line while driving top line growth? Please leave your comment below.
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