By Guest Editor
Meticulous budgeting has always played an important role in efficient allocation of resources in the business world. The most common budgeting method used by organizations has been using the previous year’s budget as a baseline because of its straightforward nature and convenience. However, this methodology does not present an accurate and rationally justifiable budgeting approach. Zero-based budgeting (ZBB) is another approach and, if properly implemented, can drive better and more efficient resource utilization and allocation.
What is zero-based budgeting?
A zero-based budgeting approach refers to the method of budgeting where each spend component is justified in each new period (a quarter, year or even multiple years). It is preferable to use zero-based budgeting wherever budget components change drastically on a year-over-year (YoY) basis due to prevailing market conditions or changes in consumer preferences. ZBB is an opportunity to support growth by reducing expenditures in less important activities. Additionally, implementation of ZBB strategy plays a vital role in the success of this initiative.
Benefits of correctly implemented ZBB approach
Key areas to consider while implementing a ZBB initiative:
1. Identification of correct decision units or cost categories:
Identifying the decision unit or cost categories is of top importance when it comes to a ZBB initiative. These cost categories are basic functional units based on the organizational structure and functions. For example, cost categories can be functions like marketing, production, HR, or R&D. During a ZBB initiative, the onus is on the respective department leads to justify the expenses and budget allotted for a department. The key criteria to consider is that this justification should not be based on the previous or historical budget; rather the budget should be prepared from scratch. As results of the ZBB initiative vary with the cost category, it is important to identify the correct cost categories for implementation. This identification of cost categories should be based on the type of organization and overall organizational strategy.
2. Leveraging organization functional synergies:
Generally, ZBB initiatives are restricted to a few organizational functions. This might jeopardize the benefits arising from the synergies between individual teams. To mitigate this associated risk, it is advisable to share a communication plan with all stakeholders in advance. Also, there are times budget cuts might impact employee morale, which is detrimental to overall business performance. Open communication with stakeholders also helps mitigate risk associated with team morale.
3. Data package prioritization:
Decision packages that are individual proposals within each unit are prioritized and ranked in the order of their importance and criticality. For example, in a manufacturing unit, various projects can be earmarked and then prioritized based on the business requirements. This helps ensure available resources are efficiently utilized starting from the most critical activities. Prioritization should be approved by top management. This top management approval helps in capitalizing on synergies of individual cost categories. It also helps ensure the costs prepared for each unit is accurate and realistic. Lastly, it helps align organizational strategy with the objectives of each cost category.
4. Policy usage:
ZBB implementation involves drafting policies that help realize the benefits forecast in the initial phase. Therefore, it is essential that policies are drafted pragmatically to derive maximum benefit. Policy implementation should also be monitored and evaluated on performance and KPIs identified in the planning phase. A high level of compliance is required for the organization to benefit from the ZBB initiatives.
For example, as part of demand management for a ZBB initiative in cost categories such as telecommunication, organizations generally draft policies for the usage and reimbursement of company-provided phones, voice and data usage bills. Since all business users have different requirements, it’s important that the reimbursement policy be in line with the stakeholder’s needs. An analysis of the different levels and needs of users (as per the role or business function) in advance helps in achieving the desired results of the policy.
5. Alignment with organizational strategy:
Sometimes organizations become engaged in many low priority activities, leading to a loss of focus on the bigger picture. It is important to align objectives of ZBB implementation of different decision units with the overall organizational strategy. This can be achieved by increasing visibility at various reporting levels. Clarity on goals and visibility on progress via efficient reporting helps in capitalizing on all identified opportunities.
A ZBB approach helps in maximizing resource allocation to the most vital activities, and this leads to operational efficiency as well as a way for management to make flexible priority decision making. It requires specially trained professionals who can use data analytics to understand and make decisions based on real business needs. Also, at times, organizations pay more heed to short-term tactical objectives rather than long-term strategic goals, which might impact the overall efficacy of this approach. However, these risks can be mitigated with effective implementation. The benefits from effective implementation of ZBB go a long way in achieving a company’s objective of sustainable growth with optimal utilization of resources.
As a Senior Consultant at GEP, Rakesh D. is responsible for leading the sourcing of various categories and building effective stakeholder relations to enhance existing performance. His areas of expertise include strategic sourcing, planning and forecasting, demand management, inventory planning, spend analysis, project management, qualitative and quantitative analysis and stakeholder management. He is currently a part of a special taskforce team in helping his clients achieve the ZBB targets.
As a Senior Consultant, Ashutosh Tyagi has led several strategic sourcing initiatives across multiple categories such as IT, GPS, MRO, Capital and Logistics. He was instrumental in successfully implementing ZBB initiatives across categories such as General Professional services, Information Technology and MRO for one of the Fortune 500 corporations. Currently, he is the Category Manager handling MRO and Capital portfolios of a Fortune 500 corporation in the Asia Pacific region.
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