Cost reduction is a challenging topic for many companies, but especially for those in aerospace and defense. Jim Harris, who leads Bain's Aerospace, Defense & Government Services practice in the Americas, describes the benefits of using zero-based redesign and zero-based budgeting to focus on the real requirements to running a business as efficiently as possible.
Read the Bain Brief: Why Zero-Based Budgeting Goes Wrong
Read the transcript below.
JIM HARRIS: Cost reduction is a challenging topic for most companies, and that's especially true in aerospace and defense. With a legacy of cost-plus contracting, it's very difficult to create a culture where every dollar matters. And yet, this is a time where the customer values more and more capability at a lower and lower price every day.
Historical cost-reduction efforts have focused on top-down targets, which may work well the first time you try it, but the second and third time you pull that lever, it's just much less effective. And while it may be good at getting a single function cost, it doesn't do well at getting it those costs that cut across the organization.
In our experience, we've found that, actually, companies that try a different approach have had much more success. And that's zero-based redesign and zero-based budgeting. This requires taking a clean-sheet approach, looking at the entire operation, and saying, "What are the real requirements to deliver the business today, not the processes that have built up in layers and layers of complexity over time?"
These companies tend to do a few things well. They take that set of requirements and eliminate the unnecessary work that's no longer required and have it go away. Two, they create as much standard work as possible, not letting each program or each business area have its own processes and tools. And then three, they invest in automation, which may not have made sense for a single function, but when you pull the full-value-stream view and look at engineering all the way through sustainment, you can build a business case that actually makes it pay off.
The results, they can be quite significant. Companies that take this approach are routinely seeing 25% or more savings in the functions and processes that they attack. They can then use that savings to reinvest it in higher-value areas, whether it be in new product development, enhancing a certain set of capabilities, or offering their product to their customer at a lower price point.
Why Zero-Based Budgeting Goes Wrong
Four common pitfalls can keep companies from achieving lasting results.