Betting on zero-based budgeting’s trifecta – Money Perception

At a time when the business landscape is rapidly transforming—shaped by macroeconomic headwinds, digitalization and activist investors seeking more bang for the buck—many companies are adopting cost-cutting initiatives to stay ahead. A recent global Bain and Co. survey found that a large number of companies are deploying zero-based budgeting (ZBB) to address the growing pressure to reduce costs. In the Asia-Pacific region, for example, 80% of executives interviewed for a 2015 report said they expected to implement ZBB programmes—a huge jump from 13% a year earlier. Globally, four times as many companies were anticipating such initiatives.

As CEOs kick off the budgeting cycle for fiscal year 2019 in the next couple of months, they may want to step back and assess their organizations through a ZBB lens. We are already seeing an increased level of interest in ZBB from Indian clients across sectors including consumer products, healthcare, chemicals, agribusiness and automotive.

In Bain’s survey, companies that used ZBB as part of a comprehensive effort were nearly twice as likely to say they were satisfied or very satisfied with the results, compared with their counterparts that pursued limited initiatives. In our experience, the most successful outcomes result from using ZBB in concert with an approach to organizational and business process simplification that we call zero-based redesign (ZBR). In contrast, companies that deploy ZBB solely for the lure of cost-cutting run a double risk: They can cut into growth muscle and hurt the customer experience.

In the same way that ZBB forces companies to scrutinize every dollar of spending, ZBR enables companies to radically revamp their operating models by analysing which activities should be performed, and at what levels and frequency. It helps them examine how they could perform these activities better—potentially through streamlining, standardization, outsourcing, offshoring or automation. We’ve found that, when it comes to taking (and keeping) cost out, zero-basing the work and the operating model are as important as zero-basing the budget. If you do not remove layers and streamline decision accountabilities, complexity and work come back.

The trifecta of Ebit margins, revenue and employee engagement

Besides improving cost performance, a truly effective ZBB/ZBR programme energizes employees and spurs growth. We analysed the experience of 11 large companies to better understand performance across a trifecta of success metrics: Ebit (earnings before interest and tax) margin growth, revenue growth and employee engagement. Of those companies, eight outpaced their industry in Ebit margin growth in the 6-12 months after they adopted ZBB, while seven beat their industry in revenue growth. Yet, when we looked at Glassdoor data, nine of the 11 companies failed to inspire employees, and they saw the percentage of employee promoters (i.e., those who would recommend the company to a friend) drop by an average of eight percentage points after ZBB implementation.

So, why is it so hard to keep employees motivated and achieve full potential? While ZBB/ZBR is seen as a cost-reduction exercise, it’s actually a new capability that can help restore an ownership culture. Getting the full value requires changing a company’s mindset around two fundamental ideas. First, instead of treating overheads as expenses, the best companies regard the programme as an opportunity to reframe them as a multi-year investment in building assets—the capabilities and human capital—that can deliver a sustained competitive advantage. Second, companies need to emphasize the central human element of building the organizational muscle for continuous cost improvement. Lasting results require a highly collaborative process designed to change long-term behaviour and build a new organizational capability—a new culture of owners—and that takes time.

A fundamental shift in thinking

ZBB/ZBR provides granular visibility into how you spend your fixed overhead dollars and a high-resolution dashboard that strengthens your operational control of those dollars. Moreover, it gives companies a repeatable process to set aggressive, yet achievable, targets, with clear spending policies and a continuous way to scrutinize every dollar of spending. With strong leadership and involvement from the chief executive officer, chief financial officer and chief human resources officer, and an eye towards risk mitigation, ZBB/ZBR serves as a catalyst for a cost-conscious cultural transformation. A broader ZBB/ZBR effort is especially important when the cost ambition is bolder (20–40% reduction), such as for companies in consolidating industries, in lower-growth environments or in industries facing inflections in the cost experience curve from digital disruption.

With clients in India, we have achieved significant cost savings by applying Bain’s ZBB/ZBR toolkit across value chain elements (e.g., a 35–40% reduction in general and administrative expenses, 25–30% reduction in services, 15–20% reduction in labour costs, 5–10% reduction in procurement costs and 25–30% reduction in planned capex).

When fully implemented, ZBB/ZBR can reawaken a company’s ownership mindset, eliminating the clutter that makes it hard for employees to do their jobs and simplifying the organization and practices that frustrate results-oriented high performers. It’s not just for challenged businesses but also an essential capability for high-growth or innovation-oriented firms.

The risk is in doing it wrong. Our work with clients has helped us identify the five biggest ways companies fall short on achieving and sustaining the trifecta, and how to overcome them.

ZBB/ZBR is fundamentally a superior system for cost management and culture change. Companies can achieve these goals only through strong leadership, a clear insurgent mission to guide the effort, attention to the company’s unique needs, a holistic approach that addresses organizational complexity, and an unwavering dedication to keep employees engaged. This is what separates the companies that establish themselves as cost, energy and growth leaders—trifecta winners—from those that reap no more than temporary savings.