Five new truths about zero-based budgeting

There are five new myths and realities that illustrate how the potential of zero-based budgeting has grown…and improved.

Here is a brief excerpt from an article about those myths written by Kyle Hawke, Matt Jochim, Carey Mignerey, and Allison Watson for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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What could zero do for you?

In “Five myths (and realities) about zero-based budgeting,” we described just how powerful zero could be in an environment where, every year, budgets start from zero rather than an increase or decrease compared to the previous year. More recently, “Zero-based budgeting then and now: Technology remakes the ZBB rules” showcased some of the breakthroughs that are making zero-based budgeting (ZBB) more practical and potent than ever. Yet even as more and more organizations commit to ZBB, doubts persist.

There’s justification for a degree of skepticism. At some organizations, executives claim they are “doing ZBB,” but the financial rewards have been much less impressive than the headlines promise, with margins rising by little more than what traditional cost-cutting methods would achieve. In other situations, tales of underinvestment in growth or overinvestment in elaborate spending rules have caused management teams to pause.

We continue to believe that this robust methodology—formed upon simple tenets of visibility, accountability, challenge, and resource reallocation—can unlock tremendous shareholder value well beyond the consumer sector. And it’s more achievable than many executives may think. But we now see that five new myths have emerged that can keep organizations from even getting started.

The good news is that the realities we have encountered in our work with a wide range of organizations confirm what ZBB can achieve. They also show what ZBB is really all about, what changes it requires, what actions are necessary for successful implementation, and how organizations can adapt ZBB to achieve the results they need.

[Here’s the first myth and reality.]

Myth one: If it doesn’t upend the whole company from top to bottom, it isn’t ZBB.

Reality: ZBB programs can vary significantly, both in scope and intensity.

The cases we have seen confirm our belief that the greatest impact results when the aspirations are high and the approach is thorough, with sustained top-down leadership and bottom-up organizational commitment. But within those broad outlines, the ZBB methodology allows for a range of choices.

Among them are the degree and pace of savings to be attained—targets that are best determined at the CEO level to fit the company’s overall strategy and financial objectives. Additionally, companies must make decisions about how to roll out and govern ZBB, such as whether to address the entire company at once or to start with individual functions, businesses, or regions.

Some choices, however, can undermine the cultural change that is essential to ZBB’s long-term effectiveness. A few organizations have tried to omit the granular, bottom-up budgeting and resource-reallocation decisions that ZBB calls for. Those tasks are essential to reinforce ZBB as a mind-set, and not including them in the process risks leaving the organization with just another cost-cutting project whose effects fade within a year or two.

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Here is a direct link to the complete article.

Kyle Hawke is an associate partner in McKinsey’s Atlanta office, where Carey Mignerey is a partner; Matt Jochim is a partner in the London office; and Allison Watson is a senior practice manager in the Southern California office.

The authors wish to thank Matthew Maloney for his contributions to this article.

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