Companies that follow this strategy tend to create a culture of awareness about cost drivers, budget cuts and targets.
A growing number of global companies, from Alcoa to Unilever, are adopting zero-based budgeting (ZBB) as a financial technique. Following many years of decline since its introduction in 1970 as a result of lack of clarity and media criticism, the technique is finding new popularity among companies as a way to improve productivity and employee engagement with corporate processes. The number of companies that mentioned zero-based budgeting in their quarterly earning calls rose from 14 in 2013 to 90 in 2015, according to the international consultancy McKinsey.
In a zero-based budgeting process, all expenses in the organization are analyzed and justified each new reporting period. Every unit within the company starts from a “zero base,” and its costs must be associated with specific needs. The budget for each organizational function is set based on its future costs, regardless of costs in previous years. Companies that follow this strategy tend to create a culture of awareness about cost drivers, budget cuts and targets.
Acquirers, especially private-equity investors, often implement the method as a cost-cutting strategy following a merger. Kraft Heinz, the global food company, has implemented ZBB accounting, led by its new owner, 3G Capital, a private-equity firm. The ZBB method allows private-equity firms to standardize cost management practices across portfolio companies and invest savings in growth strategies.
Zero-based budgeting works well with the private-equity business model, since it requires a management team dedicated to this thorough and time-consuming process and a small investor group that supports such a financial transition.
As more corporate functions are served by digital solutions, the corporate-software market has reacted by providing zero-based budgeting tech platforms. Anaplan, for example, a growing Web-based enterprise system for business planning, includes it among its financial solutions.
This accounting strategy has its own challenges that should not been ignored. A weak business case can lead to unrealistic targets, and a poor design can lead to unsustainable cost savings. Deloitte’s fourth biennial cost survey from April 2016 shows that 65% of companies adopting ZBB failed to meet their cost-reduction targets, while only 57% of companies adopting other methods did not meet their goals. ZBB can also raise communication and PR challenges, by sending the wrong signal to employees and markets; as it may be perceived as a recessionary action rather than an investment and marketing strategy.