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Everything you need to know about Zero Based Budgeting
Zero Based Budgeting has been a hot topic in the boardroom for quite a while. But what exactly is it – and what does it mean for Procurement?
It’s a natural inclination for business leaders to adjust processes when things get complicated, and I think we can all agree that things have rarely been more complicated than in the last year – especially for global Procurement organisations.
Against the backdrop of a global pandemic, Procurement leaders have had to deal with rapidly changing customer expectations, macro-economic turbulence, and unexpected shifts that have upended business models and cost structures in almost every industry.
In this context, making the right business decisions becomes more important than ever. Quite simply because the consequences of getting them wrong are far greater.
That’s why, in boardrooms across the world, executives have been racking their brains to find new ways to grow the top and bottom line, improve decision-making, reduce inefficiencies, and sharpen their competitive edge. Unsurprisingly, budget decisions are at the heart of these considerations.
One tool mentioned with increasing frequency in this regard, is Zero Based Budgeting (ZBB). It’s not a new idea by any means, but one that has seen a re-emergence in recent times as business leaders look for new ways to squeeze more from their budgets and make sure they invest in the right places. But what is it? And what does it mean for Procurement?
What is Zero Based Budgeting?
Zero Based Budgeting is pretty much exactly what it sounds like. It’s a methodology that requires managers to plan each year’s budget starting at zero. That means completely disregarding what has occurred in years past and developing and justifying all budget line items from scratch.
This may seem like a risky approach. There’s a quote about failing to learn from the mistakes of the past, I believe. But the benefit of ZBB, is that budgets can be allocated based entirely on what the company needs now. And in a world where the now changes with unerring frequency, this can be hugely helpful.
ZBB gives you the opportunity to re-evaluate every business activity in light of how expenditure will generate revenue, drive new efficiencies, or improve the competitiveness of the firm. And by doing this every year, you can more closely align investments with the realities of your current business environment – not what has or hasn’t worked before.
What does this mean for Procurement?
For ZBB to work effectively, conversations about budget requirements must involve people with an in-depth knowledge of what each function requires, as well as insight into what the impact of those expenses might be. There’s a huge emphasis on cross-functional collaboration here. And for that to be successful, Procurement should be at the very centre of it.
Fundamentally, Procurement brings much needed visibility into every stage of the ZBB process, from insights into the material portion of the corporate cost base, to a clear view of spending patterns, savings opportunities and compliance.
It can even help identify decision-makers that should be involved in budgeting decisions, and provide foresight into the impact of specific ZBB goals – not just in terms of savings, but also improved service, customer satisfaction, enhanced productivity and beyond.
All of this combines to provide everyone in the C-Suite with a comprehensive sense of what is at stake and what can be achieved – making it far easier to identify and compare options for the best allocation of budgets.
From an organisational point of view, the impacts of this can be profound. But there are also big benefits for Procurement as a function. ZBB initiatives, if handled correctly, force Procurement into a strategic position at the C-Level table, and perfectly illustrate that the department’s value extends way beyond simply driving savings.
Zero Based Budgeting can be a really useful tool when global market conditions are changing with the regularity they are today. But, it’s also one that divides opinion. In my next blog, I’ll look at the advantages and challenges associated with ZBB.
Omer is a co-founder of The Smart Cube and leads the firm’s business across The Americas. He works with Procurement and Strategy leaders at global organisations, transforming their teams to become value-driven and insight-led. Omer has more than 30 years of management consulting, global corporate and industry experience across North America, Europe and Asia. His prior roles include A.T. Kearney (North America), Warner Lambert (USA) and The Perrier Group (Asia-Pacific). Omer has an MBA from the University of Michigan at Ann Arbor, USA, and a BBA from the University of East Asia.