This article originally appeared on Forbes.com.
More companies are turning to zero-based budgeting but enjoying it less.
A recent global Bain & Company survey found that more companies facing pressure to cut costs are deploying this proven tool. In the Asia-Paciﬁc region, for example, fully 80% of executives interviewed for a 2015 Bain report said they expected to implement zero-based budgeting programs. But if history repeats itself, their rates of satisfaction will be low. Less than half of all large companies reported success from their efforts.
We recently analyzed the experiences of 11 large public companies, measuring performance across a trifecta of success metrics: EBIT margin growth, revenue growth and employee engagement. Eight of those companies outpaced their industry in EBIT margin growth in the six to twelve months after they adopted zero-based budgeting. Seven of the companies beat their industry in revenue growth, with the top performer surpassing the average by ﬁve percentage points. Despite these gains, zero-based budgeting did not inspire employees. Based on data from Glassdoor, the percentage of employees “recommending the company to a friend” dropped in nine of the eleven cases, by an average of eight percentage points. In hundreds of observations on employee engagement, we’ve seen such declines occur as discretionary energy wanes, top talent exits and morale ﬂags.
In our experience, the most successful companies boost employee engagement by using zero-based budgeting in concert with an approach to organizational and business process simpliﬁcation that we call zero-based redesign. This approach can reawaken a company’s ownership mindset, eliminating the clutter that makes it hard for employees to do their jobs and simplifying the organization and practices that frustrate results-oriented high performers. A simple example: Before 3G Capital used a zero-based system to clarify roles and objectives, eliminate layers and standardize processes at Kraft-Heinz, one manager reported that he struggled to keep pace with a flood of up to 300 emails and numerous unproductive meetings in a typical day. Now his inbox collects fewer than 40 daily emails, and meetings are highly focused and efﬁcient.
A thoughtfully devised, simpler environment should energize people, enabling them to improve performance and earn financial rewards for their results. Higher employee engagement positions a company to increase both revenues and margins faster than competitors over the long term. It also can set the stage for Agile ways of working.
How to achieve that vision? First, instead of treating overheads as expenses, regard the program as an opportunity to reframe them as a multiyear investment in building assets—the capabilities and human capital—that can deliver a sustained competitive advantage. Also, emphasize the central human element of building the organizational muscle for continuous cost improvement. By primarily focusing on technicalities such as cost packages and policies, the odds of success drop dramatically. Lasting results require a highly collaborative process designed to change long-term behavior.
As with any major change, the CEO and leadership team must be willing to maintain the commitment over the long term, serving as role models and coaches, and sending clear and consistent messages throughout the organization. As a starting point, companies need to clarify—possibly rediscover—their insurgent mission. Our colleagues Chris Zook and James Allen introduced the concept of the insurgent mission in The Founder’s Mentality: How to Overcome the Predictable Crises of Growth. At its highest level, the insurgent mission answers the fundamental question: Why do we exist? The company must understand the insurgent mission and the resulting strategy, spelling out how it differentiates the company in the market.
Next, the company needs to assess its current and past return on operating expenses to inform savings and investment opportunities. The objective is to determine how to weight opex toward those areas of the business that provide the best long-term returns and are most consistent with the insurgent mission, making sure every dollar is a working dollar in service to strategy.
Each organization is unique, and to maximize results, the effort must be attuned to a company’s culture. When designing the zero-based budgeting capability, the ﬁrst critical questions to answer concern the scope of the program. Companies need to determine how restrictive to make spend policies, for example, or how deeply to tie incentives to zero-based budgeting performance.
Zero-based budgeting doesn’t tell you how to take out the cost. To do that, companies need a holistic approach that tackles complexity just as it tackles overconsumption. In the same way that zero-based budgeting forces companies to scrutinize every dollar of spending, a zero-based redesign enables companies to radically revamp their operating models by analyzing which activities should be performed at what levels and at what frequency. It also helps them examine how they could perform these activities better—potentially through streamlining, standardization, outsourcing, offshoring or automation.
Best-in-class companies reengineer the work to optimize the cost to serve customers. They adapt the operating model to reduce organizational and business complexity, clarify decision making and accountability, and rebalance the portfolio to discontinue dilutive or non-strategic investments. This holistic line of attack delivers a simpliﬁed, ﬂatter organization that empowers employees by clarifying the link between individual responsibilities and the most critical value drivers in the business.
To avoid losing the hearts, minds and energy of employees, companies need to make a compelling case for change, linked to company strategy, and translate it into meaningful behavior change for employees. The best companies don’t design their zero-based budgeting in a back room to be unveiled to the organization as a fait accompli. Instead, they co-create it with key change agents (e.g., the package owners) across the organization. With greater empowerment and responsibility, employees can become more engaged to make front-line decisions. Companies can further improve the employee experience and value proposition by channeling some of the savings back into investment in employees.
When most successful, zero-based budgeting creates a new culture of ownership. And feeling like an owner is something that employees can get excited about. Companies can achieve this only through strong leadership, a clear insurgent mission to guide the effort, tuning the zero-based budgeting dials to a company’s unique needs, a holistic approach that addresses organizational complexity, and an unwavering dedication to keep employees engaged. This is what separates the companies that establish themselves as cost, energy and growth leaders—trifecta winners—from those that reap no more than temporary savings.
Jason Heinrich, Eric Garton and Brad Martin are partners with Bain & Company.