6 minute read 1 Jun 2021
Zero-based budgeting (ZBB)

Zero-based budgeting in the post-COVID era

By Vimal K Ramamurthy

EY India Business Consulting Partner

Business Consulting Partner with over 20 years of experience in manufacturing operational excellence and outsourcing advisory, across sectors. He has deep knowledge in supply chain and operations.

6 minute read 1 Jun 2021

In the wake of the pandemic, companies are shifting towards zero-based budgeting to save vital costs and focus on their strategic priorities. 

We are in 2021 and the COVID-19 situation continues to evolve fast. This has caused major disruptions to businesses in India. Over the past 12 months, many businesses had to deal with the budget pressures and various uncertainties, especially in the supply chain. Businesses had to cut costs just to stay afloat and/or manage their working capital needs to maintain short-term efficiency and boost liquidity.

In this volatile business environment, business leaders are gripped with many pertinent questions, ultimately to find a solution that can aid them in managing their costs and savings better in this environment. One way that the companies can address these pressing questions is by inducting zero-based budgeting (ZBB) and manage their overriding costs better.

The benefits of zero-based budgeting

Zero-based budgeting is a structured approach by which businesses can start afresh with resource allocation and reset their cost structure and base. This enables businesses to identify cost reduction opportunities and redirect funds to advance certain strategic priorities. The approach to ZBB has also grown; from just have a selling, general and administrative expense (SG&A) approach taken by businesses earlier to a more holistic solution, i.e., driving strategy management, cost transformation, reinvestment optimization, supply chain transformation and accountability.

Zero-based budgeting can help companies sustain savings and drive growth and create a sustainable cost governance structure and process.

Thus, it is imperative in today’s environment for businesses to have ZBB as part of their integrated planning cycle. To succeed, business leaders must have an open mindset and become ready for change management.

  • Zero-based budgeting in automotive sector

    COVID-19 had a major impact on vehicle sales, leading to major market disruptions. In the middle of all this, the external environment along with policies are also rapidly changing, be it, the rise of electric mobility, more connected cars, contactless sales, rapid digitization, among others. With these changes, the automotive sector needs to budget for existing as well as future plans, and that requires a renewed focus on cost management and the use of Zero-based budgeting.

This approach will help move the spotlight from day-to-day affairs to more strategic initiatives.

The thinking and implementation of ZBB must come from the leadership, because it’s not just cost optimization that’s led by the finance or the procurement team. The leadership team must set the strategic direction of the business where the resources need to be allocated more while eliminating unnecessary expenses that are not aligned with the overall business strategy. ZBB can help shift funds into initiatives that can drive sustainable growth in the future.

  • Zero-based budgeting in healthcare sector

    COVID-19 has added a lot of pressure on both private and public healthcare players. The situation has already led to an increase in administrative costs for many healthcare organizations in India. Hence, this is an opportune time for business leaders to right-size their budgets and start their budgeting process with a clean sheet. This needs to be followed by discussions with key stakeholders on what to prioritize now, next and beyond.

There are many examples in other sectors as well, be it insuranceconsumer goods, manufacturing, etc. where zero-based budgeting has led to substantial cost savings for organizations while redirecting funds to other long-term strategic priorities.

Moving towards implementation of zero-based budgeting

The pandemic has led to an increase in administrative and other unplanned costs for businesses across the board, irrespective of their sizes, which in many occasions have outpaced revenue growth.

Zero-based budgeting is one of the key methods to control the costs, and that’s where the role of the CFO and other functional heads from the leadership team comes in. Together, their focus should be to form a ZBB team to do scenario-based planning across the value chain, work with the budget owners and start a new budget from scratch and then map out the key drivers of the budget. The team must track the progress of the budget periodically and take corrective measures as required.

The adoption and implementation of zero-based budgeting by organizations, across industries, can lead to:

  • Cost optimization
  • Meeting strategic business objectives
  • Creation of funds for the future
  • Drive the business transformation agenda

The savings made through the zero-based budgeting process and the human resources that are freed up can then get diverted to high priority projects that will drive value in the long-term for businesses.

Case of a global consumer products company

This global firm, which operates across five categories with 10+ well-known brands in beauty, personal care and salon, was on a high growth trajectory and even acquired a new haircare brand recently.

Given the high growth and spends, the firm aimed to optimize its business in America, and needed to optimize their selling, general and administrative (SG&A) spends of $200m+ in FY19 to reach their 2020 strategic goals for revenue and growth. The management team faced a couple key questions- how do they support their 2020 goal of 25% + CAGR? How do they optimize their costs and support their overall business strategy? What areas should they target for reduction and what areas should they target for reinvestment? The firm took a three-prong approach:

  1. Attain cost visibility by establishing cost baseline (i.e., cost benchmarking and optimization recommendations)
  2. Cost optimization opportunity identification (i.e., upgrade and automate manufacturing facilities, recommend and develop a business case for cost optimization opportunities)
  3. Executing zero-based budgeting (i.e., identifying demand drivers of cost across functions, develop ZBB tools for different cost categories and linking it to the business strategy, optimizing cost allocation and defining targets)

The output of the exercise led to reduction of SG&A costs by 10%, a fully automated budgeting solution across all its product categories and alignment of budgets to the firm’s strategic goals.

Today, the automated ZBB solution is helping the global firm strategically manage its SG&A costs by linking them tightly to its strategic goals for growth.

Case of an Indian multi-national IT and BPO organization

Here, the organization was looking to optimize its costs across critical categories, i.e. travel and accommodation, hardware, software, AMC, among others. The organization automated its zero-based budgeting and system-based budgetary controls and could make 10-15% savings in key categories.

How effective is Zero-based budgeting?

Let’s take another example in the automobile space. One of the large automobile players faced a challenge in controlling the cost of consumables, tools and other factory supplies as there was no yardstick to measure these requirements to take the next steps in the manufacturing process. By setting up weekly consumption standards based on floor observations and leveraging ZBB, the organization could save ~9% on the sub-categories.

Summary

To respond to the impact of the pandemic, zero-based budgeting can be a very effective tool to re-budget existing costs and make way for new project spending aligned with the strategic business priorities of the business.

About this article

By Vimal K Ramamurthy

EY India Business Consulting Partner

Business Consulting Partner with over 20 years of experience in manufacturing operational excellence and outsourcing advisory, across sectors. He has deep knowledge in supply chain and operations.