There are many examples in other sectors as well, be it insurance, consumer 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:
- Attain cost visibility by establishing cost baseline (i.e., cost benchmarking and optimization recommendations)
- Cost optimization opportunity identification (i.e., upgrade and automate manufacturing facilities, recommend and develop a business case for cost optimization opportunities)
- 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.