Uptake of zero-based budgeting (ZBB) is on the rise among ACT members, the organisation’s new chief executive has told The Wall Street Journal.
Caroline Stockmann spoke to the paper as it emerged that consumer goods giant Unilever is expanding its use of ZBB to cut spending in two of its largest departments.
The firm’s announcement follows similar moves by the likes of beverages corporation Pernod Ricard, plus food companies Heinz Kraft Co, Mondelez International and Campbell Soup.
Under ZBB, an organisation – or division thereof – will start each year’s budgeting process from scratch, rather than simply copying and making adjustments to the previous year’s expenditure.
As Unilever CFO Graeme Pitkethly explained during an investors’ conference call, quoted in the Journal: “ZBB brings much greater visibility to exactly what we are spending and where. It’s also a great process for challenging the status quo.”
In a recent interview with just-drinks.com, Pernod Ricard CEO Alexandre Ricard noted that ZBB enhances his firm’s flexibility.
“We’ll have a junior brand manager come to us and say: ‘Entrepreneurship means having the capability to seize an opportunity if and when that opportunity pops up’,” Ricard said. “In our ZBB, then, we need a line called ‘opportunity that we don't know yet’.
“When that opportunity pops up,” Ricard added, “if that junior brand manager believes it’s more important than some other projects that they have budgeted for, then [we] reprioritise. This is called continuous reallocation of resources.”
According to Stockmann, “By starting with a clean balance sheet, it is easier to strip out some of the historic behavioural problems one comes across in budgeting – for example, people creating extra cushions and contingencies.”
Stockmann told the Journal that while the proportion of ACT members who currently apply ZBB is less than 40%, uptake across the membership is growing.
However, success rates may vary: in October last year, a global report from consultancy Bain showed that less than half of large firms (ie, those valued at $2bn or more) thought that their ZBB plans had paid off.
Meanwhile, 76% of medium-sized companies were either satisfied or very satisfied.
Bain pointed out that companies “often view zero-based budgeting as a nuts-and-bolts cost-reduction exercise. But in reality, it’s a new capability and a catalyst to help restore an ownership culture”.
Extracting full value from this approach, the consultancy said, requires a firm to change its 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 multiyear 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 organisational muscle for continuous cost improvement.”
Lasting results, Bain stressed, “require a highly collaborative process designed to change long-term behaviour and build a new organisational capability – a new culture of owners – and that takes time.”