This document provides an overview of zero-based budgeting (ZBB), outlining its key principles and steps in the process. ZBB requires managers to justify their entire budget requests from scratch each year, rather than relying on the previous year's budget. It involves analyzing all activities and ranking them based on cost-benefit analysis. Decision packages are prepared for each component of expenditure and ranked using an inverse pyramid system. The document defines important terms and components in ZBB, and emphasizes regularly scrutinizing "must" activities to avoid resource creep. It also stresses developing quality alternatives to the status quo that address key values and trade-offs.

1. ZERO-BASED BUDGETING
(ZBB)
An Essential Tool for 21st Century
Organizations

2. “A planning and budgeting process which requires each manager
to justify his entire budget request in detail from scratch (hence zero-
base) and shifts the burden of proof to each manager to justify why
he should spend any money at all. The approach requires that all
activities be analyzed in ‘decision packages’ which are evaluated by
systematic analysis and ranked in order of importance.” – Peter A
Pyher

3. STEPS in the ZBB PROCESS
The important steps in ZBB are:
• Identification of Decision Team, Decision Criteria and Decision Units
to facilitate justification of each eventual Decision Package
(component of expenditure) in the organizations’ proposed budget.
• Preparation of Decision Packages. Each package is a separate and
identifiable activity. These packages are linked with corporate
objectives.
• Ranking of Decision Packages based on Cost/Benefit Analysis.
• Allotment of corporate funds to Decision Packages based on an
inverse pyramid ranking system.
Decision Packages are self contained modules or proposals seeking
funds. Each Decision Package will clearly explain the activity, the need
for the item, the amount involved, the benefit of implementing the
proposal, the loss that may be incurred if it is not done, and the
Opportunity Cost of selecting this activity over others.

4. Definitions for ZBB Decision
Components
The Decision Team – Refers to the identified group of Key Players
who will determine the organizations’ Decision Units and the Criteria
they and others will use to prioritize Decision Packages and funding
allocations.
Decision Units – These are the components of the organization for
which a Decision Package will be required. They must have a specific
manager, have a defined and measureable impact, have defined and
measureable functional objectives, and they must have a definable
functional activity (set of processes).
Decision Criteria – These are the clearly defined considerations
that will be used in evaluating and ranking Decision Packages. They
can be both subjective and objective in nature. A Criterion could be as
objective as Ratio of Revenue to Expense or as subjective as
Alignment with Corporate Vision. Criteria definitions must be
consistently applied.
.

5. FIRST LEVEL ACTIVITY
PRIORITIZATION – Know Your
Organizations’ MUSTS, SHOULDS and
MAYS
The MUST Activities – These are the organization’s activities that must be
maintained under any circumstance. The usually represent activities related to
maintaining the Core Management Systems. While they are essential, they are
not sacrosanct in the Status Quo. They should be regularly scrutinized to ensure
they are appropriately scoped. They often suffer, or the organization does
because of them from Resource Creep.
The SHOULD Activities – These are the activities that – if resources allow –
the organization would focus on the increase orientation to Mission, Vision,
Values, Goals and Objectives. These activities represent the “Sweet Spot” of
ZBB. Any Decision Criteria should support prioritization of SHOULDS and critical
determination of which of them Matters Most.
The MAY Activities – These are activities the organization might undertake if
there were unlimited resources available. Few MAYS make the cut in the ZBB
activities of most organizations.
Great Decision Teams and Senior Leadership Teams always do a mental sorting
of MUSTS, SHOULDS, and MAYS intuitively. However, they also test their
assumptions regularly through a more formal process.
.

6. There is Power in Seeking
Alternatives (Options) to the
Status Quo
Characteristics of Good Alternatives
Developing good alternatives is an iterative task. Initially, the task is to generate a range of creative alternatives.
These alternatives are carefully evaluated technically, in terms of their estimated consequences. They are also
evaluated deliberatively, in terms of their relative desirability. New alternatives are generated, joint gains are
found and the key trade-offs and uncertainties are highlighted. By the time alternatives are presented to
decision makers, they should be:
• Value-Focused, meaning that they are explicitly designed to address the fundamental values or ends of
the decision – the “things that matter” or “felt needs”, as defined by the objectives and the evaluation
criteria;
• Technically Sound, meaning that in developing alternatives for achieving the objectives, the project team
has drawn on the best available information about cause and effect relationships and has designed
creative and diverse alternatives based on sound analysis;
• Clearly and Consistently Defined, meaning that all alternatives are defined to a sufficient and consistent
level of detail using logically consistent assumptions, and that a base case against which all alternatives
can be compared has been clearly established;
• Small in number and high in quality, meaning that poor (dominated) alternatives have been eliminated
and those remaining have been iteratively refined to incorporate new ideas and joint gains;
• Comprehensive and mutually exclusive, meaning that individual elements or components of a strategy
are combined into complete packages, and that the packages are directly comparable;
• Able to expose fundamental trade-offs, meaning that they emphasize rather than hide difficult but
unavoidable value-based trade-offs and present real choices for decision makers;
• Developed collaboratively with the people most affected, because difficult trade-offs are easier to make
and to accept when people believe that a thorough search for good alternatives has been conducted and
that the best alternatives are on the table.

7. There is Power in Seeking
Alternatives to the Status Quo
Keys to Positioning an Alternative –
1. Orient your group to the problem;
2. Specify what matters in the decision;
3. Decide how to evaluate whether or not potential solutions can
achieve the objectives; and,
4. Create more than one alternatives for decision-makers to
consider.
An alternative is a set of actions providing a comprehensive
approach to the decision problem.

8. How to Build a Decision Package
It is easier than you think and the process of building one
is more powerful than you ever thought:
• Tell the Decision Team WHAT you want to do and WHY that should
matter to the organization;
• Tell them HOW you plan to do it. This involves describing the five (5)
primary process activities of your component;
• Tell them WHO will perform the processes and WHO will benefit
from the processes, directly and indirectly;
• Tell them WHEN the processes are effected and WHY that is the
right time ;
• Tell them WHERE the processes are effected and WHY that is the
correct location;
• Tell them WHAT IT COSTS in terms of Time, Material, People and
Money; and
• Tell them the MEANING OF SUCCESS for the process. WHAT
value does it produce for the organization? HOW do you know the
value is being created?

9. Great Organizations are built by Great
People, using Great Tools learned in Great
Practical Training.
Get Yours From PGA.