The process of zero-based budgeting removes the budget’s baseline and requires every cost to be justified. In contrast to other budgeting techniques, it encourages critical thinking of historic expenses. It can offer big savings – but the process can also be complex, convoluted, costly and there are no guaranteed economies. Execution is key. In just-food’s final part of our special report on zero-based budgeting, we look at best-practice on the implementation of the strategy.
The implementation of a zero-based budget across a large global organisation can be a risky business. As Jefferies International analyst Martin Deboo notes, “if it’s not well-managed, it’s a recipe for organisational distraction”.
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By GlobalDataZero-based budgeting is not based on historical data. It aims to justify resource allocation regardless of prior budgets. The budget is first allocated a zero and the manager responsible must then make a case for resource allocation based on costs versus benefits. Every managerial activity must be defined and evaluated.
How the process is implemented is vital to the success of the project, Abhijit Ahluwalia, zero-based budgeting practice leader for consumer products and retail at EY, tells just-food.
“Zero-based budgeting programmes are far-reaching and yield significant benefits. To achieve success, we have found that clearly defining programme goals and objectives, providing access to reliable and valid data to drive decisions, and developing strong, visible leadership support are critical,” Ahluwalia observes. “A systematic approach to implementation with the right oversight, structures and policies is also key.”
Using zero-based budgeting effectively requires a specific skill set that is distinct from forms of budgeting that rely on historical data for a foundation. The need to justify each part of the budget can make managers feel their budgets are under threat. To counter these concerns and ensure the effective use of zero-based budgeting tools at every level, a focus on communication and training to help facilitate a culture change and support the benefits of zero-based budgeting in the long-term is needed.
McKinsey advisors Shaun Callaghan, Kyle Hawke and Carey Mignerey suggest the first stage of zero-based budgeting implementation should often be the establishment of a “central coordination team” to develop “deep visibility into costs” and establish systems and procedures for the detailed reporting, governance and performance management that zero-based budgeting requires. This period laying the groundwork for zero-based budgeting can take four to ten months to complete, they note.
Cost savings can be prioritised by looking at a company’s cost base. Savings are frequently sought first in activities such as travel costs that can be viewed as more discretionary. Often, the global supply chain structure can also be mined for savings.
Once a business has identified cost-saving opportunities and developed a plan for undertaking zero-based budgeting, EY’s Ahluwalia says the next phase of implementation is the “execution of budgeting and developing the plan for sustaining ZBB”.
Managers will be asked to formulate “decision packages” for their areas of responsibility based on factors such as business function, performance measures and cost versus benefit. These “decision packages” can then be ranked in order of importance and resources allocated accordingly.
Ahluwalia adds the final phase of zero-based budgeting implementation “should focus on sustaining the benefits and scaling-up the process”.
Rather than rolling out zero-based budgeting across the entire organisation, many companies opt to trial the method on a smaller scale by focusing on select functions or business segments. This reduces the risk that a full-scale roll-out would actually be detrimental to profits.
For example, US cereal-to-snacks group Kellogg has introduced zero-based budgeting to its business in North America. In August, the company said the process has yielded some solid results, citing an 110 basis point improvement in operating margin in the market during the second quarter. Kellogg revealed it is now preparing to extend the method to its global operations.
Kellogg CFO Ron Dissinger said between the start of 2016 and the end of 2018, the company forecast total savings of $450-500m from implementing zero-based budgeting across North America and internationally.
Unilever is another FMCG major that has looked at zero-based budgeting and we focus on what they have done below.
Case study: Unilever
Earlier this year, Unilever announced that it is introducing zero-based budgeting across its business. Detailing the move in April, CFO Graeme Pitkethly provided some granular detail on what the process will mean for Unilever. The CPG giant has broken its roll-out of zero-based budgeting down into three distinct steps. Here is what Pitkethly had to say.
“The scope ZBB is our spend on over hedge and marketing other than salaries. The first step, which we will take by the end of this month is to get much greater visibility to exactly what is being spent and by whom. During the step, we have defined business leaders responsible for each one of 18 cost segments, which cover most of the total spend.
“The second step is volume targeted, which means… savings with each of the individual budget holders locking them into our clients. We will start with the 22 largest markets and with the corporate locations between now and July and then move on to the next 60 countries in the remainder of the year.
“The third step of the process is implementation and control. This involves regular reviews to ensure that the savings are delivered. In combination, we expect ZBB and new functional models to deliver at least EUR1bn (US$1.12bn) of savings by 2018 with the benefits realized progressively through the second half of this year and during the course of 2017.”
Source: Unilever 2016 Q1 results conference call, 14 April 2016
