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4 ways to make zero-based budgeting a success for your firm

Zero-based budgeting (ZBB) is a technique that's been around for decades but remains fairly unpopular with many business managers, partly due to the workload involved in providing regular, detailed reporting on spending needs within each business unit to justify the funds allocated each year. But with the move to digital budgeting processes and increasing recognition of the efficiency benefits of this method from the c-suite, many CFOs are considering how ZBB could be used effectively. This interview with McKinsey partner Wigbert Böhm highlights some of the strategies that contribute to the success of a ZBB approach across the organisation. Here are four of the key strategies discussed in the interview:

Appoint cost-category owners

Organisations already have budget owners for each division but they should also appoint employees (typically senior leaders) to act as cost-category owners (CCOs), to vet budget requests for spending categories that appear across all business units. Böhm gives the example of property rental or security spending – in other words, a type of expenditure that recurs in different areas of the organisation. A large corporate might expect to have between 12-15 COOs. Böhm says: “The very existence of this role can change the tenor and content of budgeting discussions... Rather than assume that funding levels should remain the same, the CCO asks the budget owners from the business units, 'Why is this the case, and does it need to be this way?'”

Revamp your data

Implementing a ZBB approach involves a rigorous process of going through existing financial data sets and systems across the company. Böhm cites a large European utility that was able to save $150 million from its baseline spending of about $900 million, after using this process to find duplicate spending in some of its units. He says that the discussions between budget owners and CCOs at the utility firm, and the broader assessment process, from start to finish, took about eight months although he adds the process could take more like eight weeks for a smaller private company.

Choose where ZBB will be effective

If you're attracted to the idea of implementing a ZBB approach in your organisation, ask yourself if this needs to be done throughout the company or whether it would be most effective in a select number of divisions or even across one region. Your company's specific business needs will dictate where ZBB will be most useful. Böhm gives the example of a multinational food company that chose to roll out ZBB only in business units that had previously not been integrated with the organisation. He says: “This was part of the company’s objective in using ZBB – making sure that the different business units in each country cooperate more, reduce duplicate spending, and exploit basic cost-savings opportunities, such as merging their logistics networks or rationalizing their supplier base. Another firm might find that deploying ZBB in only one region or one business unit suits its needs.”

CFO support is essential

Böhm notes that: “If the CFO doesn’t support the process, the whole thing is over. The CFO must be the evangelist for ZBB.” And this support also has to come from other c-suite leaders, adds Böhm. CFOs need to convince other c-suite executive and board members that ZBB brings operational efficiencies and performance benefits, evidenced by tangible examples of success. Böhm says that CFOs should show “how people have been able to work more efficiently because of smarter resource utilization, for instance. This whole process, after all, is about improving resource allocation and ensuring that money is being spent in a meaningful way, not in a wasteful way.”

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