ZBB or not to ZBB…that is the org question? | Memo
Zero-based budgeting in modern companies.
An established Zero-based budgeting (ZBB) process is based on an extensive view of a company’s cost drivers to inform decisions. Often the company will set achievable cost reduction targets and use this view to identity where. Often you will see this displayed as a waterfall presentation.
ZBB is becoming common practice for growing and mature companies. In the end, reducing costs should be part of any companies ethos. To reduce costs and across business units, ZBB is typically a top-down exercise that Finance leads, but in partnership with various business leads across, such as Sales, Marketing, Analytics, Engineering, etc.
The key advantage of the zero-based budgeting is encouraging internal organizations to evaluate resource allocations. A good decision made three years ago may not hold today and should be reassessed systematically to ensure it is still the best option.
That said, despite some concerns about budget cuts, zero-based budgeting techniques are applicable to both mature and growth-stage companies. However, ZBB should not entirely replace existing budget allocation methods within companies.
For example, normal budget approaches towards marketing allocation, such as percentage sales or profit-maximization allocation, establish a baseline before leveraging ZBB.
ZBB should be a complementary method and used to identify the actual costs of line items or decisions. From there, the subsequent output should be a discussion of findings and a plan of action to reduce or even eliminate those costs, freeing up budgets to be reinvested into people or technologies.
An easy way to think about how ZBB can fit into a company is similar to creating a product road mapping. Year 1 can take common budget allocation approaches across teams using common assumptions to inform allocations. In Year 2, integrate ZBB models and encourage operational excellence and discover ways to reduce their respective costs. Year 3 and so forth would iterate on the process based on learnings and impact assessments of the previous years. In theory, this should lead a firm to a well-oiled and efficient machine overtime and not over night.
A potential pitfall with ZBB is that it is top-down led. If decisions only come from the senior leadership perspective and without context further down the chain, organizations will fail to find the right cost reductions. Capturing a bottom-up perspective is critical. A bottom-up perspective ensures the organization has complete visibility into cost variables with context.
With additional detail, leaders can avoid a second common pitfall, which is measuring the impact of the change. Often, decision-makers will lose sight of the interaction effect of one variable across multiple variables. This is why it is critical to work across the entire organization to create that clear view before attempting the ZBB approach.
At a previous company, a Teleco client made a drastic decision to cut TV budgets for the remainder of the year based on impartial data. Through their analysis, the client concluded TV was not an effective way to acquire new customers. At the time, brands were concerned that they were not mobile-centric enough in their outbound marketing.
Because the leadership team was looking at platform attributed data, they did not have a clear view of the customer journey, how each channel plays a role, or the context behind the current allocation.
The client decided without thorough discussion to shift the remaining TV budget to Google Search. Two years later, the client realized it made their marketing far less effective than before. The company saw their market share decrease substantially during that period compared to competitor brands, despite reinvesting $ into top-performing channels. If the client had a holistic and complete view of their media investments and appropriate context ( true impact), the leadership team would have taken a different course.
Today brands are relying on third-party measurement solutions to help create a complete internal view of their costs. Measurement companies like Nielsen or Oracle Data Cloud help businesses understand the effects of their investments on business outcomes. With the telecom client, had they used 3P data sources and service, they could have taken a more iterative and hypothesis-based approach, such as reducing 10% of TV budget will lead to X over Y period vs. cutting the remaining budge entirely. Hypothesis-based approaches are an excellent way to incorporate the ZBB approach into an organization to create new information to make better decisions.
This is why companies often are data-rich but information-poor. ZBB, along with other budgeting approaches, is very dependent on having a mature and accurate attribution model and an understanding of how your company allocates resources.
People need to understand your customer and their behaviors pre and post-sales to make informed decisions. Coupled with externality, such as seasonal moments, decision-makers can create budgets that are fixed for months or quarters at a time but are dynamically flighted to account for consumer trends and external factors. This raises a key point: budgets can be fixed and dynamic in response to the business’s performance and market. Budgets should be rooted in a key set of knowns and then adjusted systematically as new information is gathered (e.g., sales performance, R&D, new legislation, etc.).
Zero-based budgeting should not be the one-stop solution to making hard financial decisions overnight. The ZBB process should be a joint exercise that forces a top-down and bottom-up discovery journey to understand costs’ root causes and impact on performance. The ZBB approach should be collaborative to ensure the data used in the process has the correct context.
The last thing you want to do is cut costs abruptly today, thinking you will save $, only to cost you $$$ in the long run because you did not have a complete view of your organization.
