This article was written by Greg Paull, Co-founder & Principal, R3.
Just when Zero Based Budgeting (ZBB) thought it was out, coronavirus pulls it back in. Forget the criticisms in 2019 following the $15 billion loss reported by Kraft Heinz, one of ZBB’s biggest and most vocal supporters. When face-to-face with an ugly economic downturn, marketers are looking for an approach that matches the severity of the situation.
So is ZBB really making a comeback??
Yes and No.
It seems like every marketer is being forced to start with a blank sheet of paper, every function within an organisation is analysed for its needs and costs, and everyone is asking the question of what activities and resources are needed for the company to compete in future market conditions. What was once considered “extreme” is much the norm these days.
However, the focus for marketers is less about accruing cost savings and more about the smart allocation of limited capital. Where can you find the budget needed to do what needs to be done to keep the brand competitive and growing?
Unlike traditional cost reduction strategies, which bring with them negative associations of stifled growth and having to do more with less, ZBB reframes the process as an opportunity to increase the performance of the whole organisation, resulting in a leaner, more agile and self-aware business. We can broadly distinguish the difference between traditional budgeting and ZBB to three areas: mindset, approach and precision.
Creating a different mindset
A key difference between traditional budgeting and ZBB is in the concept of budgetary responsibility. In traditional scenarios, budgets are specified by top management. Also, the levels of finance allocated to various business functions are influenced by the ability of individual cost-centre owners to convince decision-makers of the profitability and value of certain programs.
In a cost-cutting environment, managers are likely to increase their budgets by more than they actually need to ensure that they have enough money to achieve what they want even in the case of elimination. In traditional budgeting, a top-down review is not required to ascertain if the previous year’s budget was used effectively or if any areas of their operations were over or under-funded. As a result, the focus is on how much a business function will receive.
ZBB, by comparison, demands a level of ownership across the company. This shift in mindset is what makes ZBB more than just an exercise in cost-reduction. Successful implementation of ZBB sees greater accountability and awareness as part of corporate culture and drives employees to act in the company’s best interest.
Introducing a different approach
ZBB starts with what a company can afford, and builds a budget from this point of confidence, ensuring that no key part of the business suffers as a result of cost-reduction. Traditional budgeting focuses on what costs can be reduced and carries the risk of crippling initiatives that might be high contributors to future revenue. It might also see the continuous funding of activities which are historic to the business, but which are becoming less relevant.
The routine nature of traditional budgeting might be practical in market environments where there is consistency, but few industries today are safe from disruption. “If you always do what you’ve always done, you’ll always get what you’ve always got.” In the volatile, uncertain, complex and ambiguous world we live in, doing what you’ve always done to set budgets might lead to a business that is unsustainable and non-competitive.
Increasing relevance and precision
One of ZBB’s identifying characteristics is its need to hone into the details. While traditional budgets are calculated using an aggregate of costs, ZBB looks at specific volume and cost-drivers. It demands a much higher level of detail in its analysis, which can be daunting to companies that do not have the infrastructure or expertise to carry it out.
By identifying specific decision packages, an organisation will be able to articulate the function, activities, operations, and extrinsic and intrinsic benefits that each package presents. Costs can be aligned to overall business objectives and evaluated across defined criteria.
Are you ready for ZBB 2.0?
It is impossible to improve on what you cannot measure, and if you do not know which brands or campaigns are increasing ROI, it will be impossible to create an accurate budget based on value. ZBB will drive accountability, both internally and externally, with marketers being held accountable to business and agencies being pushed to deliver what matters.
This more agile and responsive model focusing on measurement and accountability will empower teams to learn from failures much faster and replicate success quicker. The end game is spending marketing dollars effectively and efficiently. Marketers can mitigate cost redundancies while freeing up that money to invest in market trends, which is crucial in the current landscape of constantly shifting digital ecosystems and agency relationships models.
It is important to note that while ZBB can provide cost cuts and savings if implemented correctly, it will not solve bigger brand issues. Just like with any strategy, there are pros and cons to weigh before it is adopted, especially for companies with large marketing budgets and several brands and agency relationships to consider.
This article first appeared in Marketing Malaysia