Zero-based budgeting (ZBB) requires managers to justify all expenditures as if the budget is being created for the first time. The process involves identifying organizational decision units, constructing decision packages that analyze activities and funding alternatives, and ranking packages to allocate resources. ZBB aims to eliminate unnecessary costs by questioning existing resource allocations and requiring justification of all spending. While time-intensive, ZBB can help organizations set priorities and ensure costs align with objectives, particularly in uncertain economic environments. Successful implementation requires training managers, clear procedures, management commitment, and adequate time for the rigorous analysis involved.
1. ZERO-BASED BUDGETING (ZBB)
Is ZBB, a planning and management control tool for cutting down costs?
Table of Contents
1.0
Overview of ZBB
1.1
ZBB beginnings
1.2
What ZBB does
1.3
ZBB Basics
1.4
Identification of Organizational decision units
1.5
Construction of decision packages
1.6
Ranking of decision packages and allocation of resources
1.7
Applicability
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2. Zero-based budget (ZBB):
Zero-Base Budgeting
1.0 Overview of Zero-Base Budgeting
A zero-base budget requires managers to justify all of their budgeted expenditures, rather than the
more common approach of only requiring justification for incremental changes to the budget or the
actual results from the preceding year. Thus, a manager is theoretically assumed to have an expenditure
base line of zero (hence the name of the budgeting method).
ZBB Beginnings:
Figure 15: A brief history of Zero-based budgeting
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3. 1.1 ZBB BEGINNINGS
Although zero-base budgeting (ZBB) became popular in the 1970s, the concept has been around much
longer. As early as 1924 British budget authority E. Hilton Young advocated complete justification of
every item requested in a budget (Wildavsky 1975).
In 1962 the U.S. Department of Agriculture adopted a ground-up system of budgeting which is
considered to be the first formal use of ZBB in the U.S. government.
However, the "Father of ZBB" (Crowe 1982) is without question Peter Pyhrr, who created
and developed a ZBB system for Texas Instruments as part of his responsibilities as control administrator
in the 1960s. The idea began in 1962 when Texas Instruments started using an objectives-strategiestactics (OST) system for evaluating research and development projects (Chen 1980).
This process finally evolved into the current ZBB concept, which was popularized by Pyhrr in 1970 in
an article in the Harvard Business Review. Jimmy Carter, then Governor of Georgia, read his article,
was impressed with it, and invited Pyhrr to join him in adapting ZBB for Georgia's 1972/1973 budget.
Carter was so enthusiastic about the system that, when he became President, he ordered all federal
agencies to implement a ZBB system by 1979.
The concept of ZBB soon spread throughout both the public and private sectors with mixed
results and was the subject of many articles in the 1970s. Although Ronald Reagan dropped ZBB during
his tenure as President, and much of the enthusiasm has now disappeared (Koenig 1985), a critical look
at how ZBB works, its advantages, and possible benefits, may provide some insight as to how this system
might be adopted or adapted by organizations today.
1.2 WHAT ZBB DOES
ZBB is an operating, planning, and budgeting process that requires each manager to justify his entire
budget request in detail. The burden of proof shifts to each manager who must justify why she should
spend any money at all (Pyhrr 1977).
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4. It is designed to require the participation of managers at all levels because they are in daily contact
with the services of the organization and are the experts in the activities in their departments. ZBB
provides a consistent framework within which all managers analyze all of their operations in terms of
objectives, alternatives, performance measurements, and cost/benefits (Chen 1980).
Theoretically, each program must be analyzed, presented, and approved at the beginning of each
budget cycle with each organizational unit starting from a base of zero, hence the name (Koenig 1985).
In practice, most managers assume that basic functions currently in position are important and need to
be continued.
1.3 ZBB BASICS
Although opinion varies on how many basic steps are necessary to implement ZBB, the consensus shows
three:
• identification of organizational decision units,
• construction of decision packages, and
• ranking of decision packages and allocation of resources
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6. 1.4 Identification of Organizational Decision Units
ZBB begins with the identification of the organizational decision units, which prepare the first part of the
budget (Hammond 1980).
These units start at the lowest level for which budgets can be prepared and may be defined by
cost center, function, program or activities, or organizational unit (Taylor 1977).
In libraries, decision units may fall along department lines, such as reference, technical services,
children's, etc. Each unit, which may vary in size, must have an identifiable manager with the authority
to establish priorities and prepare budgets. It also must comprise a group of activities which can be
meaningfully analyzed and influenced by managerial decisions.
In developing decision units it is necessary to determine if the unit is essential to the organization and if
its activities and operations are in accord with the organization's goals and objectives. If it is not, then
this must be remedied before proceeding. Once these units are determined, it is not necessary to redo
this step for each budget unless there are changes made in the unit.
1.5 Construction of Decision Packages
The key to the success of ZBB is the preparation of meaningful decision packages. A decision package is
a brief justification and request document that includes the critical information necessary for managers
to make judgments on program direction and resource requirements (Sarant 1978).
These packages are created at the department level and involve describing and analyzing the activities
of that unit. The packages should include different ways of performing the same function, alternative
methods that have been identified, and the reason for the final choice.
They should also indicate different levels of effort necessary to perform the function, including
minimum, current, and incremental levels of funding and performance. The minimum level is that
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7. funding or performance level below which it is not feasible to continue a program because it and
performance level of "proposed" budget activities at the current funding level.
And the incremental levels are the proposed activities possible with additional funding.
Each decision unit is given decision package forms on which to submit their reports. These forms may be
adapted to the individual organization, but in general should include the following:
• program/activity name,
• department,
• statement of purpose (goals and objectives, what is to be done),
• description of activity (clearly defines the activities and procedures),
• benefits (what is to be gained if this package is approved),
• alternatives (other options available to achieve the same or nearly the same results),
• consequences of not approving the package (impact on the department and the organization),
• costs and resources (what is financially necessary to implement the package).
Figure 2: Formulation of decision packages
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8. 1.6 Ranking of Decision Packages and Allocation of Resources
After the decision packages have been prepared for each department, the next step in ZBB is to assign a
priority rank to each package in order of decreasing benefit or importance to the organization. This is a
process unique to ZBB.
Prime consideration should be given to the goals of the organization, which are the determining factors
to use when ranking the packages. The ranking process should start with the basic decision-unit
manager where the decision packages are developed. This enables the manager to evaluate the relative
significance of his functions and activities. These packages are then submitted to the next higher level of
management that consolidates these with other decision units. The combination of all decision unit
packages is then reranked and submitted to the next higher level of management.
This procedure of combining and reranking is repeated on up the hierarchy of the organization
until ultimately there is one consolidated ranking for the entire organization. At the top level funding
determines which packages are approved and which are not. All packages are listed according to their
ranking and a cutoff line based on the budget is imposed, all packages above the line are funded, all
packages below it are dropped.
Ranking at the top level may be done by one manager, two managers, or a group, depending on the
organization's size and structure. There is usually a minimum of confusion and a maximum of
accountability when one person is in charge (Pinola 1984) but larger institutions with greater
volume may need more than one person.
The four most common approaches to ranking decision packages are:
• the single standard approach, which is the simplest approach and evaluates all packages on the basis
of one criterion, e.g., absolute dollar savings;
• the voting approach, which is often employed by committees;
• the major categories approach, where decision packages are slotted and ranked according to a
predetermined list of major categories;
• the multiple standards approach, where important questions must be addressed: Is the program
legally required?
Can we afford not to act?
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9. In the ACCA study text of Advanced Performance management (2012:32), the Get through guide, it
defines zero-based budgeting:
“As a method which needs each cost element to be specifically justified, as though the activities
to which the budget relates were being undertaken for the first time. Without approval, the
budget allowance is zero.
Unlike a conventional budgetary system, where the budget is prepared by adding to or deducting
from the budget of the preceding period, a zero-based budget is an elaborate practice in which
managers justify activities from scratch, as they were being launched for the first time”.
ZBB is a cost-benefit approach to budgeting in which each cost element should be evaluated to be
included in the budget. Each year when the budget is prepared, all the cost elements have to be
evaluated as if the budget were being undertaken for the first time and will be authorized only if the
cost elements are justified. The justification of any cost should take into account how the expenditure
helps the organization to meet its objectives i.e. how it benefits the organization.
ZBB takes away the implied right of existing activities to continue to receive resources, unless it can be
shown that this is the best use of those resources.
Strengths
1. As a zero-base budget aims to curtail unnecessary costs, it is suitable for both profit-seeking as
well as not-for-profit organizations to adopt this kind of budget.
2. A ZBB is best suited to the service industries and to not-for-profit organizations where, for each
activity, alternative courses of action are possible. In such organizations, ZBB helps in deciding
the most appropriate way of performing the activity.
3. ZBB can also be successfully applied to discretionary costs and support activities. It may be
noted that discretionary costs are the fixed costs (usually) that arise from periodic budget
approximation decisions taken according to organizational policy.
4. For an activity where there is no clear relationship between the input and output, zero-base
budgets can be used. Where there is a clear input-output relationship, it is not possible to
reduce the requirement of the input.
5. Zero-base budgeting creates a questioning attitude within the organization which helps to
curtail the activities which do not provide the best value for money.
6. ZBB focuses attention on the features of the products/services in relation to value for money.
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10. Weaknesses
1. Zero-base budgeting is time-consuming and therefore expensive to undertake.
2. Managers whose areas of responsibility are subjected to ZBB may feel threatened by it. If
senior management is aware of the potentially threatening nature of this form of budgeting,
care can be taken to apply ZBB with sensitivity. However, in the quest for value for money,
the application of ZBB can result in some tough decisions being made.
Source: Adapted from ACCA study -Advanced Performance management (P5)( 2012:33)
Figure 3: Summary of ZBB
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11. 1.7 APPLICABILITY
Since ZBB is a flexible budgeting tool, it can be used by most libraries regardless of size, nature, or
structure. But according to Austin (1977), ZBB is not a technique that can be universally applied. He
believes ZBB may not be effective where management is not interested in the process, where the
organization is stable and well under control, or where the organization is too small in size to
warrant adopting ZBB.
Libraries that may want to consider adopting a ZBB approach include organizations with economic
pressures, where expenditures exceed income, or where there is an unusual amount of activity. A library
that lacks the ability to set priorities in its levels of service or whose costs do not match the stated
objectives of the organization might well benefit from implementing a ZBB approach, as would
any other organization in which traditional budgeting processes are ineffectual (Stonich 1977).
Since most libraries operate as a subordinate unit of a larger organization, the choice of what budgeting
structure is to be used is rarely left to the discretion of the director.
If ZBB is not adopted by the higher organization, the library staff might well be faced with an
unacceptably high level of paperwork in preparing budgets in two different formats (Crowe 1982).
Conversely, if the higher organization has implemented ZBB, it is probably in the best
interest of the library to cooperate (Koenig 1985). Often it is not the library that decides which
budgeting procedure to use; the parenting organization may be the crucial determinant.
If, however, a library organization has decided to use the ZBB approach, Chen (1980) has listed nine
major factors necessary for the successful implementation of a ZBB system in libraries.
Briefly,
1. Be sure you have a thorough knowledge of the organization, its goals, mission, objectives, users,
programs, costs, strengths, weaknesses, staff, and support structure.
2. Maintain horizontal and vertical communication among managers and staff. This is critical in any
system but especially during the ZBB process where decision packages may tend to overlap and cause
confusion.
3. Link current organizational goals and objectives to long range planning. The identification of goals and
objectives along with an analysis of current programs provides a basis for long-term planning.
4. Make sure there is a definite need to implement ZBB.
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12. Unless there is a need to adopt the ZBB system and unless this need is shared by all levels of
management, an organization should not attempt to undertake any unnecessary changes.
5. Establish systematic and well-developed procedures designed to meet the specific needs of a library.
These procedures should be clearly defined, and if possible, listed in a manual available to all.
6. Implement extensive training opportunities for all managers.
This training can be provided through courses or workshops and should be supplemented with a
training manual.
7. Obtain strong management involvement and commitment. While strong upper-level management is
necessary, lower-level management involvement is equally important for it is at this level that the
crucial decision packages are prepared.
8. Allocate adequate time. This is absolutely necessary for planning, implementing, analyzing, and
organizing.
9. Consider the human factor. It is important to make library managers comfortable with the process
and excited about its potentials.
Figure 4: Management’s involvement in the zero-base budgeting
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