Supply Chain Matters Tutorial- Pros and Cons of Zero-Based Budgeting
In the light of this week’s announcement of the mega-merger among HJ Heinz and Kraft, coupled with the new interest in zero-based budgeting techniques, we felt it was timely to provide a brief tutorial on the process.
A Google search can yield ample content and perspectives on this process.
In definition, zero-based budgeting (ZBB) is essentially a financial-driven process where budgetary resources are set to zero every year and must be justified for the new budget period. It was a process originally conceived in the seventies in an era where organizational bloat among large corporations was rather common. Instead of referencing the previous year’s budget, the slate starts over with managers having to justify their business assumptions and required expenditures for the upcoming period, as if they were a new business or support function. Every budget is viewed from a fresh perspective and evaluated and approved based on relevance to overall corporate goals and expected outcomes.
In context it is rather important to note that ZBB is often a financial-driven process and can be undertaken and applied within companies or organizations that are required to considerably reduce costs and improve profits. As some are now pointing out, that is why it is garnering increased interest in among large consumer product goods producers.
It is rather important that organizations understand the pros and cons of this process. In our effort to do so, we are sharing our perspectives. We certainly encourage our readers to add their perspectives and experiences in the Comments section associated with this posting so that many can benefit.
Pros of ZBB:
- A mechanism that facilitates much higher levels of cost reduction than traditional budgeting methods.
- Relate costs to the specific mission and purpose of an organization at a given time.
- Garner much more detailed understanding of an individual organization’s role and purpose and that organization’s staffing and resource levels.
- Weed out duplication, ineffective and/or counterproductive activities.
- Uncover additional opportunities for cost synergies.
- Provide a means for prioritizing spending cuts
- Some would argue that it diffuses an entitlement mentality by requiring detailed justification.
Cons of ZBB:
- Clearly ZBB consumes a tremendous amount of time and organizational energy. Some would argue it can take up the bulk of organizational time, constantly having to justify and re-justify efforts.
- In many cases, ZBB can stifle bottom-up or supplier based product or process innovation, since there is little time or resource for such efforts.
- Consensus is difficult and often painful.
- The impact to employee morale can be substantial, not only in the dimension of perceived perks, but in individual value and promotional opportunities.
- Pits individual organizations in competition with one another.
- Cuts can be taken to an extreme.
- There can be a loss of focus to new, emerging or undiscovered opportunities among business, industry or new markets.
- Needs to be implemented very carefully and skillfully.
Now at this point, you may have discerned that this analyst and consultant may have biases towards the cons of ZBB. Contrary to the past, many industries and businesses have undertaken initiatives grounded in Six-Sigma, Just-in-Time or Lean Manufacturing methods. Thus, a lot of bloat or excess has already been analyzed and addressed. Some might argue whether these efforts were ultimately positive or detracted from business goal fulfillment or the overall reduction of costs. Others would argue that the above methods did not effectively address organizational overhead or layering. I believe that on the whole, they were successful.
In my career, I have found that ZBB methods must be carefully and methodically conducted in the light of a well understood mission and clearly articulated strategic roadmap. Talent recruitment, skills development and ongoing career opportunities must not be sacrificed by the process. ZBB can often bring foreword a “survivor” mentality where political skills outweigh either proven years of experience or sacrifice the required leaders of tomorrow. ZBB can sometimes be a panacea for wholesale human resource shifts. The process can further serve as a radical change to supplier relationship and collaboration practices.
The difference today is that certain private equity investment firms such as 3G Capital are setting a different, or perhaps more acute standard.
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