Zero Based Budgeting can provide big benefits for those looking to spend smarter – but it’s not without its challenges. We weigh the pros against the cons.
In my previous blog, I explored Zero Based Budgeting (ZBB); what it is, how it works, and what it can mean for Procurement organisations.
ZBB is a surprisingly divisive issue in boardrooms. People tend to find themselves firmly parked on one side of the issue or the other, either celebrating the efficiency it embeds in budgeting processes, or believing it leads to the wrong incentives and therefore poor results.
To try and provide a balanced view of this issue, and add a little nuance to the debate, this blog will outline the pros and cons of ZBB as I see them – from better budget alignment on one hand, to the possibility of damaged employee morale on the other.
The big benefits of ZBB
Let’s start with the benefits to kick us off on a good note. First off, ZBB allows budgets to be much better aligned with overall company strategies and enterprise-wide objectives.
It does away with the idea of using past experiences to dictate budget allocation, and for the most part that’s a really good thing. Quite simply, the stance of “this has worked before so let’s do it again”, doesn’t hold water unless it’s backed by facts and data. And it certainly doesn’t stand up to scrutiny in a complex global business environment that’s in a constant state of flux.
Instead, with ZBB, each budget decision is made looking at the needs of the business in the now, using comprehensive cost-benefit analysis to dictate allocation. As a result, this approach provides new levels of efficiency, and can even help to shine a light on obsolete processes, activities and operations that exist purely because, at some point, they worked.
Ultimately, one of the reasons there are so many advocates of ZBB is because it instils real discipline in allocation, moving away from automatic budget increases driven by inflation. And, because ZBB assessments are carried out annually – and don’t take into account past spend – it curbs the temptation for departments to burn through allocations at year end to avoid a budget decrease the following year.
In essence, with ZBB there’s no room to simply ‘pull together’ a budget. Every allocation has to be carefully examined and each budget individually constructed based on a forward-facing strategy.
The challenges of ZBB
Now that the fun stuff’s out of the way, let’s look at the drawbacks.
Because it’s so focused on cost-benefit analysis, one of the common criticisms of ZBB is that it doesn’t factor in the qualitative benefits of certain experiences. In fact, unless you’re especially careful, it’s likely that your natural tendency will be to review all expenses with a quantitative lens.
The short-term focus of ZBB can be a double-edged sword, too. Although it’s great to make decisions based on the now, if you don’t take time to consider the future implications of those decisions, it can have a detrimental effect on your organisation’s ability to meet its long-term goals.
There’s also concern among many, that ZBB can lead to rigid adherence to defined budgets, which can damage your ability to respond to unexpected changes. And if there’s anything we’ve come to expect over the course of 2020, its unexpected changes.
Perhaps the biggest concerns though, revolve around the effort involved, and the impact ZBB can have on employee morale. As a process, it’s incredibly labour intensive and requires the right skills and insights to get the most out of it. The time and attention to detail required can potentially disrupt operations, and result in slow or delayed funding for critical projects.
And then there are those who don’t receive the required funding at all. In many recent examples, I’ve seen excessive budget cuts dictated by ZBB have a negative effect on employee morale. And in difficult economic times, like those we’re currently experiencing, this may happen with increasing regularity.
It’s worth mentioning, that in complex business environments there’s no such thing as a silver-bullet solution. Every decision is really about balancing benefits and drawbacks. For me, ZBB falls firmly into this category. But, if thoughtfully and strategically deployed, it can undeniably be a valuable tool that can take both individual functions and the organisation as a whole to the next level.