Zero-based Budgeting has a bad reputation. Pioneered by Peter Pyhrr at Texas Instruments in the 1970’s1, Zero-based Budgeting (ZBB) is a cost-cutting strategy designed to eliminate wasteful spending. Managers typically consider last year’s spending when setting the budget for a new year.2 Under ZBB, however, past spending is completely ignored. Every single expense must be justified – and this can lead to significant cuts.3 Companies can reduce SG&A costs by up to 25% in a matter of months.4
So why did ZBB get a bad rap?
Because requiring managers to start the budgeting process from scratch each period creates several issues:
1. It’s time consuming.
Managers must spend time justifying each expenditure rather than doing their job.
2. Perks (and people) get cut.
Managers may find that ZBB leads to their travel being restricted5 or their jobs being eliminated.6 3G Capital Partners, a Brazilian private equity firm that has led the resurgence of ZBB, reduced headcount at Heinz by 4% and closed several factories in the process.6 Walgreens, the most recent firm to adopt ZBB, plans to slash $1 billion in costs.2 While some employees might be happy to see their executives travel in corporate jets less frequently, they are less happy when ZBB makes them justify the amount of soap they use in the bathroom or the amount of Gatorade they drink.6
To avoid the negative connotations associated with ZBB, Coca-Cola chose to call it “zero-based work.” Whatever firms choose to call it, ZBB is more popular than ever. More than three hundred international firms, including several Fortune 500 firms, use ZBB.2 And consulting firms have been quick to champion ZBB. McKinsey7, Bain8, Accenture3, and Boston Consulting Group9 all offer services to help implement ZBB. These firms have tried to rebrand ZBB as a shift in mindset and the creation of a cost management culture4 to avoid the baggage associated with ZBB.
The main demand for ZBB appears to be coming from older firms whose days of rapid growth are long behind them. For such companies, the promise of rapid cost reductions offers an easy way to create value. And while employees might not like it, there will always be a place for cost reduction strategies when other efforts to increase the company’s share price are unsuccessful.
Some firms using ZBB:
Alcoa, Philip Morris, Kraft Heinz, Walgreens, Unilever PLC, Mondelez International, Coca-Cola, Boston Scientific, Jarden Corporation, Quiksilver, Campbell Soup.
References:
[1] Pyhrr, P.A. (1977) Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses. John Wiley & Sons.
[2] Shumsky, Tatyana. (2018, Dec 30). Zero-Based Budgeting Stars in Walgreens’ Cost-Cutting Push. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/zero-based-budgeting-stars-in-walgreens-cost-cutting-push-11545388200
[3] Accenture. (2018). Getting Ahead by Cutting Back. Retrieved from https://www.accenture.com/us-en/insight-getting-ahead-cutting-back
[4] Callaghan, S., Hawke, K., & Mignerey, C. (2014, Oct). Five Myths (and Realities) about Zero-Based Budgeting. McKinsey & Company. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-myths-and-realities-about-zero-based-budgeting
[5] Mahler, D. (2016, June 30). Zero-Based Budgeting is not a Wonder Diet for Companies. Harvard Business Review. Retrieved from https://hbr.org/2016/06/zero-based-budgeting-is-not-a-wonder-diet-for-companies
[6] Kesmodel, D., & Gasparro, A. (2015, March 25). Kraft-Heinz Deal Shows Brazilian Buyout Firm’s Cost-Cutting Recipe. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/from-heinz-to-kraft-zero-based-budgeting-sweeps-across-america-1427308494
[7] McKinsey & Company. (2018, Dec). Zero-Based Productiviy. Retrieved from https://www.mckinsey.com/business-functions/operations/our-insights/zero-based-productivity
[8] Bain & Company. (2018, Dec). Zero-Based Budgeting and Redesign. Retrieved from https://www.bain.com/consulting-services/performance-improvement/zero-based-budgeting/
[9] Boston Consulting Group (2018, Dec). Zero-Based Budgeting. Retrieved from https://www.bcg.com/en-us/industries/consumer-products/zero-based-budgeting.aspx
