Businesses now, more than ever are having to ensure their strategy and operating model are as resilient as they can be. In the wake of COVID-19, the Russian/Ukrainian war and inflation, businesses are now facing cost pressures like never before. Many organisations, no matter how big, or small are looking to ensure they are as lean as possible to achieve sustainable improvements in cost efficiency to fund margin growth and build resilience for external macro shocks.
Should we, therefore, be asking ourselves whether Zero-Based Budgeting (ZBB) is part of the solution to driving out cost and creating a resilient value chain to offer businesses a chance to thrive in this ever-toughening business environment?
Whilst ZBB was first introduced in 1969, it has remained at the forefront of many approaches to cost optimisation and acts as an invaluable tool, allowing organisations to highlight the opportunity cost of every pound spent. However, ZBB is now also being used strategically, rather than just as a budgeting tool and it is enabling organisations to fundamentally challenge their current resources against their future strategy and make tough decisions, with better transparency of which costs are aligned with strategy.
More traditionally, ZBB is constructed from the bottom up, where organisations start with a blank canvas, set a legal and regulatory baseline, and then justify how every cost and activity is required to support their functioning. This stops non-strategic/non-value-adding costs from creeping into the budget and subsequently from eroding the margin.
ZBB first challenges the ‘effectiveness’ of spending by asking questions and presenting options to deliver activities at differing levels of service e.g., by lowering the frequency or extent of activities but with a clear view of the associated risks. It then determines the ‘efficiency’ of the activities, by examining how best to deliver the selected future activities. For example, could the activities be delivered better by a 3rd party or could they be automated or centralised? Other cost optimisation approaches often miss the ‘effectiveness’ step which means the organisation doesn’t challenge what adds the most value to the strategy.
It is no secret that to be successful in the current climate, organisations must ensure that costs are as low as possible, whilst continuing to provide their distinctive value to the customer. ZBB helps organisations to look through a cost-focused lens to ensure that every part of their budgeted spend is doing what it claims to and is genuinely contributing in real terms to value-adding activities that customers are willing to pay for.
This would suggest that ZBB could be a lifeline that organisations desperately need during these uncertain times, as it brings a range of cost initiative benefits to firms who may have traditionally used an old fashioned rolled over budget, which may eat into their margins and hence hinder their growth potential in extremely competitive environments. However, it isn’t always easy, it puts an organisation’s whole cost base under scrutiny which can be uncomfortable and cause uncertainty and risk if not managed in a controlled way.
As organisations buckle up for potentially uncertain times, those who budget from the bottom up, driving out all non-value-adding costs will be the ones who are rewarded for their proactive and innovative response to what is indisputably an ever-changing and increasingly challenging business environment. Taking out costs is never easy, however, where ZBB works, is in stopping organisations from having to negotiate from the current status quo when it can be easy to justify the current spending and identify the risk in changing. It can also act as a key enabler to allow businesses to create fundamental change and structure themselves in a way to move forward and maximise success in this turbulent climate.
However, whilst ZBB is an excellent tool in which to unlock opportunities and create efficiencies across your value chain, there are also less invasive cost-out options for businesses that aren’t operating in an environment where undergoing such large transformational change is possible. This could be in the form of Spend Control Towers to drive down external costs using demand and spend management. This approach, whilst still proactive and focused on delivering significant cost-out efficiencies to the bottom line, allows clients to deliver targeted cost-out solutions rather than reinventing their cost base. Naturally, the value delivered may be lower due to less addressable spending, however, this form of transformation can be delivered in a faster time frame and offers clients the option to close the gap between capacity and capabilities without disrupting business-as-usual operations.
To talk further about how 4C can help your organisation with Zero-Based Budgeting, other cost reduction or transformational initiatives please contact Sebastian Kay at Sebastian.Kay@4cassociates.com