More Related Content Similar to Zbb making sense again in 2018 Similar to Zbb making sense again in 2018 (20) More from Javier Caravantes More from Javier Caravantes (20) Zbb making sense again in 20181. Why zero-based
budgeting makes
sense again
Advanced digitization, enhanced behavioral understanding, and
smarter organizational and governance models spark a renaissance
for a decades-old methodology.
by Hanspeter Hueter, Carey Mignerey, and Tao Tan
After first making a splash inthe1970sandthenfadinginpopularityover
theensuingdecades,zero-basedbudgeting(ZBB)ismakingacomeback.At
itsbest,ZBBbringsremarkablespendingvisibility,helpsachieverelentless
costdiscipline,encouragesmanagerstoreallocateresourcesinanagile
fashion,andunleashesacultureofcontinuousimprovement.Thosebenefits
applytoorganizationsinallstagesofthecorporatecycle,frommature
(andoftenprofitable)companiesstillbudgetingunder“sameold,sameold”
methodologiestomorenimble,posttransformationfirmstryingnottoslide
backtotheirformer“businessasusual.”
Tohavemaximalimpact,ZBBneedstobemorethanjustaroteimplementation
oftheprocess’stextbookdefinition;namely,tobuildacompletelynew
budgeteachyear,functionbyfunctionandprojectbyproject,bystarting
fromazerobase(ratherthanbystartingfromtheprioryear’sexpenses).
Fortunately,advancesinunderstandingthepsychologybehindZBB;the
availabilityofnewer,digital-basedtools;andthepowerofsingularpurpose
withinanorganization—includingtherightmessagingfromseniorleaders
January 2018
2. 2
andappropriateincentivestowalkthetalk—aremakingiteasierthaneverto
bringZBBbacktothefore,andtosustainitsimprovementsforthelongterm.
ZBB: WHY NOW?
ZBBisdesignedtoscrutinizeeverydollar.Inalow-growthenvironment,
it’seasytoseewhykeepingcostsdownwouldbeespeciallyattractive.But
thefundamentalsofP’s&L’shavelargelybeeneverthus,andtoday’sZBB
renaissancecomesfrommorethanjusttypicalmarginforcesatwork.In
fact,thecurrentclimateofdisruptionisuniquebecauseithasbroughta
heightenedscrutinyaboutwhichbusinessmodelsmakethemostsense(even
whenthatmeansadramaticshiftfromthecompany’straditionalfocus)and
howresourcesshouldbeallocatedtobesteffect.Decisionsmustbemade
faster,resultsareexpectedmorerapidly,andperformancedetailsarelaid
baretoabroaderaudiencethaneverbefore.
Fortunately,today’schallengeshavebroughtnewadvancestomeetthem.
That,too,representsachangefromthe“sameold,sameold.”Formanyyears,
ZBBwastediousandtime-consuming—certainly,moredifficultthanrules
ofthumbsuchas“lastyear’sbudgetplusorminus”somepercent.Let’sface
it:budgetingcanbeachore,andfinancedepartmentsatlargecorporations
mustcollect,collate,review,andrevisebudgetsfromhundreds—ifnot
thousands—ofcostcenters.Thatcanbefrustratingbothtothebusinesses,
whichrelyontheallocatedcapital,and,evenmore,fortheworkersforcedto
alignbyhandavastarrayofdifferentlyformattedspendrequests.Ironically,
theintroductionofuser-friendlyspreadsheetsoftwareactuallyexacerbated
theproblem.Familiardesktop-spreadsheetsoftware’sversatilityand
flexibilitysimplydoesnotscalewellandenablesdifferentmanagersto
produceanalmostinfinitevarietyoftemplates,whichmakeaggregating
themanevenmoremanualanderror-proneordeal.
Newdigitaltools,however,nowreadilyavailablecommercially,virtually
eliminatethispainpoint.Effectivecloud-baseddigital-budgetingproducts,
whilenolessintuitivethanofflinespreadsheets,areprogrammedto
compeldisciplineddataentry.Thisforcesmanagerstoaligntheirinputs
toformatsthatsynthesizeinstantly.Theresultisabudgetinggodsend.At
oneconsumer-packaged-goods(CPG)company,forexample,oneglobally
deployedcloud-basedtoolreplacedmorethan10,000offlinespreadsheets,
vastlyfreeingupthetimeandcapacityofthefinancefunction.Thetools—
fast,scalable,andeasytodeployandconfigure—alsohelpedthecompany
integratebusinessrulesanddatavalidationintothebudget-planning
process,andenableddifferentcutsoffinancialdatasuitablefordifferent
purposes.Perhapsmostimportant,theadvancesmadefinanceassumptions
3. 3
moreclear,fosteringaconsistentapproachthroughouttheorganization.
ThathelpedeverybodytoworkfromthesameZBBplaybook.
TURNING ‘WHY’ INTO ‘HOW TO’
It’simportanttorecognizewhyZBBissignificantagain,andit’sencouraging
toknowthatdigitaladvancesareopeningnewpossibilities.Butactually
pullingoffatransitiontoZBB—andbetteryet,sustainingtheshift—requires
adeeperunderstandingofhowZBBcangainacceptance,andwhatleaders
mustdotokeepitthenewnormal.
ZBB and how our brains work
ZBBisatitscoreaboutbuildingacultureofcostandperformance
management.Assuch,itworksbestwhenitaccordswithhowpeoplethink
andbehave.Inourexperience,managersofeffectiveZBBimplementations
oftensucceedbecausetheyharnessandchannelemployees’ownhardwired
behavior.Sometimes,thesecretofsuccessmayseemamystery—butifwe
understandthewillbehindtheway,itdoesn’thavetobe.
Onenormalhumanbiasislossaversion,alsoknownas“theendowment
effect.”Thisphenomenon—ouringrainedpreferencetoavoidlossesmore
thantoacquireequivalentgains—isdeeplyrootedinhumanevolution.For
example,losingone’sdailyfoodrationcouldleadtoillnessordeath,but
gainingoneadditionalrationwillhaveonlylimitedbenefits.Ourdefault
psychologicalsettingthusistoguardwhatweneed,ratherthantogambleon
acquiringsomethingwemaynot.
LeaderscanframeZBBtoneutralizelossaversionbypresentingitas
buildingupfromazerobase;thatis,asano-riskspendinggaininsteadofa
painfulcostcut.Caseinpoint:onecompanykickedoffitscost-reduction
drivewithaline-by-linereviewofitsupcominginvestmentprojects.
Management’sintroductionsweretocancel,defer,ordecreasespending
whereveritcould.Theexecutivestaskedwithidentifyingpotentialcost
cutsinitiallycameupwithareductionoflessthan5percent.Butwhenthey
blankedoutthereductionsandchallengedtheteamtojustifyaddingtothe
corporatebasebudgetprojectbyproject—thusavoidingtheappearanceof
loss—thesameexecutiveswereabletoachievemorethan40percentsavings.
Thesamebusinessleadersapproachedtheproblemwithanopenmindto
fundamentallychanginghowbusinesswasbeingdone.Afterafewroundsof
backandforthtoresolvecross-dependencies,leadershipsuccessfullyshifted
mind-setsawayfromthepsychologicalframeworkoflossaversionand
towardasenseofcomingoutahead.
4. 4
Asecondingrainedbehaviorisstatusquobias,otherwiseknownasthe“path
ofleastresistance.”Oneillustrationistheorgan-donationrateinGermany
andAustria.Germanyrequiresorgandonorstoactively“optin,”while
Austriaassumesalldriversautomaticallyconsenttoorgandonation,but
permitsthemtoaffirmatively“optout.”Despiteanextensive(andexpensive)
awarenesscampaigninGermany,thecountryachievedamere12percent
organ-donorrate.InAustria,bycontrast,theorgan-donorrateis99percent.
That’sbecausepeopletendtostickwiththestatusquo.1
Toencourageazero-basedapproachinyourorganization,planforZBBto
bethedefaultoutcome.Forexample,considermakingunderperforming
productsorbusinesslines“sunset”automatically,subjecttoan
accountabilityexception,suchasrenewingspendingonlyifamanager
activelystumpsforit.Designatinganewstatusquohelpsunleashpreviously
untappedcreativityandfreesmanagerstoinvestmoretimeandattentionin
exploringalternative,digitaloptions—andmakescostdisciplinethepathof
leastresistance.
Athirddemonstrabletraitisthatpeoplebehavemoreaccountablywhenthey
perceive—consciouslyorsubconsciously—thatsomeoneelseiswatching.
OneofmanyexamplesisanexperimentconductedbypsychologistMelissa
Bateson,whoplacedan“honestybox”alongwithapricelistforteaand
coffeeinauniversitycommissary.Nexttothepricelist,dependingonthe
week,sheplacedeitherapictureofflowersorapictureofeyes.Average
paymentswereaboutthreetimeshigherduringtheweekswhenpicturesof
eyesweredisplayed.Therewerenosupervisingpersonnelandnosecurity
cameras,yetthemeresuggestionofbeing“watched”causedthecommissary
userstoadjusttheirbehavior.2
Peoplebeingpeople,thisdynamicplaysoutincorporatesettingsaswell.
Wehavefoundthatthesimpleexerciseofsubmittingspendingrequeststo
one’smanagerservestotampbudgetsdown—notbecausemanagersare
predisposedtorejecttheincreases,butbecausetheperceptionthatsomeone
elseispayingattentioninducesemployeestoexerciseself-restraint.To
takeanotherexample,onecompanyweknoweliminated20percentofits
printingcostsmerelybypostingthepreviousmonth’scostsnexttothe
1
William Samuelson and Richard Zeckhauser, “Status quo bias in decision making,” Journal of Risk and
Uncertainty, 1988, Volume 1, pp. 7–59; Jacob Nebel, “Status quo bias, rationality, and conservatism about
value,” Ethics, 2015, Volume 125, Number 2, pp. 449–76, philpapers.org.
2
Melissa Bateson, Daniel Nettle, and Gilbert Roberts, “Cues of being watched enhance cooperation in a
real-world setting,” Biology Letters, 2006, Volume 2, Number 3, pp. 412–14, rsbl.royalsocietypublishing.org.
5. 5
stationeryarea.Anotheropenlydiscussedinleadershipmeetingsthecostof
theprintingforthatspecificmeeting—veryquickly,presentersdeclinedto
bringprinteddocumentsknowingthattheiraudiencewouldknowthecost
(andenvironmentalimpact)theyincurred.Thisvisibilitymakesemployees
takenoteoftheamountsbeingspentandhelpedfostera“DoIreallyneed
this?”mind-set.
Aligning personal with process
Forallofthepersonal,psychologicalreasonswhyZBBshouldgain
acceptance,we’vefoundthatthegreatestobstaclesoftenarisefromthe
institutionalworkingsofindividualcompaniesthemselves.Toofrequently,
ZBB’sdetailedbudgetscancomeoffasonemoreburdensometo-do—even
moresowhenthebudgetsareimplementedasaseriesofrotedirectives
accordingtoaprescribedscript.Andwhencompaniesfailtocomeoutofthe
gatequickly,budgetmissestendtocompound,becomingprogressivelymore
difficulttoovercome.Whowouldn’tresistunderthosecircumstances?
RatherthantrytoramZBBthroughorganizationalinertia,leadersshould,
aswe’vediscussed,turnhumanbiasesintoaforceforpositivechange:
presentZBBnotasalossbutasagain;makeZBBthepathofleastresistance;
andtapthepoweroftransparency.Addtothat,aswell,theveryhuman
preferencefororderabovechaos—nowaddressablethroughpowerful,
intuitivedigitaltoolsthatsimplify,expedite,andputeveryoneonthesame
budgetarypage—andthelikelihoodforsuccessisevengreater.
Buttoreallydrivethechangeshome,organizationsmustbuildacost
culture—whichmeans,inturn,thatadditionalmeasuresarecritical
(exhibit).AcrucialstepistoaligncompensationwithZBBconviction.
We’vefoundthatrewardinghigh-performingbusinessleaders—withboth
hardandsoftincentivesalignedtocontrollableperformanceelements—is
essential.Atonemultinationalcorporation,forinstance,seniorexecutive
compensationwaschangedsothat,inorderforanexecutivetoreceivethe
maximumvariableportion,heorshewouldfirsthavetomeetaspecific
thresholdforperformanceonthemanagementofoperationalexpenditures.
Thoughtfullycontrollingcostswentfrombeinga“sidejob”tooneofthecore
focusareasforthesenior-leadershipteam.
Inaddition,theentiretyofseniormanagementmustpresentaunifiedfront
ofsupportanddisciplineaboutprioritizingspending(evenifdoubtsand
candiddebatecontinue).Toooften,C-suiteleadersmakeloudcommitments
tocloseanexpensegap,evenasotherexecutivesunilaterallyproceededto
6. 6
approvenewspending,oftenjustifyinganexceptionasa“no-brainer—we’ll
findthemoneysomewhere.”Thattypeofmixedmessaginginvariably
reverberatesthroughoutanorganizationandcanultimatelyknockcost-
cuttinginitiativesofftherails.Successfulefforts,bycontrast,insistona“no
hall-pass”policy.
Forexample,oneglobalCPGcompanyputinplacetwoparallelprocesses
aspartofitsZBBprogram—allspendhadtogothroughthat.Thefirst
processapprovedspendingfor“businessasusual,”whichcouldincludeno
incrementalreinvestment—andthatfreedupabout22percentoftheirtotal
fixed-costbase.Thesecondprocesswasestablishedforallincremental
spendingandreinvestmentthatwerecentrallyreviewedacrossbusiness
units—thinkSharkTankforalargecorporation.Theresultwasvisibility
intospending,clearlinkagetostrategicpriorities,andultimatelymargin
expansiondrivenbythought-filledanddeliberatediscussions.
Finally,it’svitaltostandfirmonthepointthatthepivotisnotthewhole
story.Infact,it’sjustthefirstchapter.Farfrombeingsimplyatactictosave
costs,ZBBforcescompaniestostrategicallyreevaluatetheirpriorities
onanongoingbasis.Ourresearchconfirmsthatcompaniesthatregularly
Exhibit
Building a cost culture involves more than just budgeting from zero.
QWeb 2017
Zero-based budgeting (ZBB)
Exhibit 1 of 1
Make costs visible and
accessible by grouping them
on two dimensions—type
and owner
Transparency
Make a conscious effort to
introduce tension in the
process to ensure category
owners take concept seriously
(eg, CFO challenging CMO)
Governance
Set aggressive top-down
targets, establish a common
fact base and analogous
cost comparisons across
operating units, and insist
on monthly checkups
Process
Stop proving why things
are the way they are and
start thinking about how
to make things better
Mind-set
Measure cost performance
(in addition to growth and
profit) and align managers’
compensation to costs they
control
Incentives
7. 7
andaggressivelyreallocatetheirinvestmentsachievehigherreturnsto
shareholdersoverthelongterm.3
It’snotunusualforbusinessmethodologiestogoinandoutofstyle.Times
change,andcompaniesmustcontinuallyadapt.Butthefundamental
imperativeofkeepingcostsdown—andallocatingresourcestomaximum
effect—remainsafirstprinciple.Advancedunderstandingsofhuman
behavior,dramaticimprovementsindigitaltools,andanever-growingbody
ofempiricalevidenceforbudgetarysuccesssustainedovertimeisleading
manycompaniestotakeafreshlookatZBB.Chancesare,they’lllikewhat
theysee.
Copyright © 2018 McKinsey Company. All rights reserved.
Hanspeter Hueter is an associate partner in McKinsey’s Vienna office, Carey Mignerey is a
partner in the Atlanta office, and Tao Tan is an associate partner in the New York office.
The authors wish to thank Allison Watson Pugh for her contributions to this article.
3
Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where your strategy is,” McKinsey
Quarterly, March 2012, McKinsey.com.