Managing Change Blog
Zero-based budgeting (ZBB) is gaining momentum. In contrast to traditional budgeting's focus on incremental spending, ZBB is a broad-reaching effort to reduce costs that examines all expenses in each new period. The ZBB approach helps companies sustain a lower cost structure and has become a critical ingredient in any well-thought-out cost transformation. The results are impressive.
Even so, many leaders do not have a good sense of what zero-based budgeting really means, and they often fail to see how current company beliefs may get in its way. Making explicit the desired beliefs and behaviors is a huge accelerator to any transformative change. A cost transformation using zero-based budgeting is no exception.
ZBB can actually help uncover beliefs that are holding companies back, it can change managers' mindsets and behavior, and, in the process, counteract certain common misperceptions—the following six budgeting myths among them.
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Myth No. 1: "It's finance's job to build the budget."
Companies hold line managers and their finance partners accountable in different ways. Ultimate accountability for money the company spends falls to the line leader, yet often those line leaders rely too heavily on their finance business partners. Line leaders can't delegate this. Their finance business partner can help them understand the trade-offs being made, but the line leader needs to play an active role.
Myth No. 2: "Senior vice presidents shouldn't look at spreadsheets."
At its full potential, ZBB requires that a leadership team actively dig into the financial detail. An attitude that reviewing expense data in detail is below an executive's pay grade just won't work. Obviously, leaders must balance their time wisely, but the answer is not disengagement of senior leadership from this process. CEOs and CFOs need to reinforce that leaders should know their expenses in detail.
Myth No. 3: "We already manage the costs that matter."
That is exactly the problem. When all of the attention goes to the handful of costs that are the largest or most discretionary, other costs tend to get ignored. The idea of ZBB is to routinely examine all spending. ZBB leaves no stone unturned. All costs matter, and an efficient process is created to ensure that every dollar goes toward its highest and best use. Recently, when a service company undertook just such a review, managers quickly found that one supplier owed the company millions of dollars in uncollected reimbursements. What is hiding in your chart of accounts at the transaction level?
Myth No. 4: "My business is unique; we could never standardize our cost infrastructure."
Leaders often worry that their costs cannot work within a standard cost structure or that they will be unable to adapt to a rearrangement of their accounts. The reality is that even the most complex companies can standardize their cost structure.
Myth No. 5: "We already do this."
Great line leaders may already be building their budgets using zero-basing assumptions, but that does not mean that they couldn't do even better. Significant value can be unlocked by using a ZBB approach across the company. Managers should ask themselves: When was the last time I raised budget dollars for a cross-functional or cross-business priority? Do I rush to spend money toward the end of the year in a bid to use it or lose it? Do I spend savings generated in my profit and loss statement, or do I add to those savings for the greater strategic good?
Myth No. 6: "My budget, my rules."
Budgeting is a prisoner's dilemma. If your colleague in marketing negotiates down agency fees and then spends the savings to create new customer insights for a product launch, is that good or bad? If he made sure market research was the highest and best use of those funds vs. some other operating expense, then it is fantastic. If he didn't, then others will say, "Well, if he spent his money on his priorities, then I will, too." Even worse is when leadership fails to reinforce a total company mindset, permitting hundreds of cost center owners to allocate their budgets however they see fit. It's a best practice for companies to have ongoing conversations about spending trade-offs. At its best, ZBB feels like a team sport.
The most effective leadership teams tackle these mindsets by helping their people recognize them and then prescribing specific actions to take during the key moments when exhibiting the desired behavior will have the most benefit.
ZBB significantly affects middle management. Senior leaders must reinforce desired behavior—and not just by modeling it. The best results come from in-the-moment feedback that offers between three and five positive comments for every criticism. Most attempts at changing management behavior focus on tactics such as training and triggers such as alerts, but leadership interaction that provides positive feedback is the most powerful.
Strategic budget alignment—that is, ensuring the highest and best use of every dollar—is too often fleeting. Companies face constant change. Strategic priorities change. People change roles. There is alignment on the best use of every dollar—until there isn't. So the key to a strong, sustained ZBB capability is clarity and reinforcement of the desired leadership mindset and behavior.
Sarah Elk is a partner with Bain & Company in the Chicago office, and Jon Webber is a principal with Bain & Company in the Atlanta office.
A successful cost program is not an event, but a change in the way a company does business.