Gartner Research

How Sydney Water Drives Cost Savings Using a Value-Based Budgeting Model

Published: 30 September 2020

Summary

This research will help executive leaders understand how Sydney Water delivers cost savings by implementing zero-based budgeting as an exercise in value maximization instead of cost cutting, and successfully drives discipline in the business’s discretionary spend.

This research has been adapted from which helps finance leaders learn how Sydney Water drives discipline in cost-saving efforts and provides the business with a transparent process to win back funds.

Executive inquiries about zero-based budgeting (ZBB) have nearly doubled since 2019, and they often reveal a misunderstanding of what ZBB really is. Although ZBB regularly comes up in cost optimization discussions, only half of organizations implementing ZBB have realized the savings or margin improvements they anticipated. This is not only due to implementation, but also because of a fundamental misunderstanding about ZBB.

Unfortunately, the name “zero-based budgeting” seems to be the cause of many misunderstandings. For instance, ZBB is sometimes criticized as unrealistic because many costs cannot be reset to zero at the start of a new budgetary period. That’s because most organizations make contractual commitments to pay employees and suppliers during future periods. Purchasing and supply specialists are often given incentives to make large, long-term cost commitments in return for a lower price they can recognize as a cost saving. This cost saving doesn’t necessarily facilitate or result in a budget reduction. Distracted bypast spending commitments, ZBB can then degenerate into a search for ways to spend less.

By positioning ZBB as an exercise in value maximization, instead of cost cutting, Sydney Water successfully drives discipline in the business’s discretionary spend. The risk-based opportunity cost assessments for operating expenditure (opex) and project spend give the businesses an opportunity to win back a portion of the cost-savings pool. Through this approach, Sydney Water has overachieved against cost savings targets while proliferating innovative business improvement ideas to better serve their customers.

Sydney Water begins by assessing the extent to which spending cuts pose risks to the achievement of strategic objectives. This is done using a decision map that evaluates all opex and project spends (see Figure 1).

Figure 1: Sydney Water’s Spend Evaluation Decision Map

The benefits of this approach include:

  • There is no requirement for a new risk assessment framework.

  • A balance is provided of operational and financial expertise in evaluations.

  • Businesses are more invested in the process when there is an opportunity to win back funds.

  • Heat map risk assessments provide continuous allocation decision guidance throughout the year.

  • Having one corporate contingency pool prevents businesses from padding their own budgets with contingency funds.

  • Budgeting for a normal risk year allows a drawdown on operational risk pools as a contingency.

The risk assessment exercise helps in creating heat maps for different business units (see Figure 2). These heat maps, created in collaboration between business and finance managers, balance the operational and financial expertise required for efficient savings risk evaluations. They are then presented and discussed in-detail during executive workshops.

Figure 2. Cost-Efficiency Improvements Heat Map

After evaluating the spends and creating heat maps, a cross-functional group of executives comes together in a series of peer-driven spend evaluation workshops that break down planning silos and optimize cross-organization spend decisions (see Figure 3). The agenda for these two-day-long workshops include:

  • Brainstorming efficiencies and identifying ways to reduce efficiency savings risk

  • Securing group consensus on which projects will be added to future years’ budgets or added to the efficiency savings pool

  • Presenting, evaluating and voting on new initiatives to get added to the budget

It is the facilitator’s role to ensure that the discussions are on track, decide when it’s time to park an issue for later discussion or move on completely, and record actions and outcomes discussed by executives to establish accountability.

Figure 3. Example of Peer-Driven Spend Evaluation Workshop Discussions

The executive workshop at Sydney Water seeks to help achieve winbacks that increase the business’s willingness to identify cost-saving opportunities. Winbacks can catalyze other cost-reduction efforts because they normalize the idea of routinely seeking out cost savings. When business leaders see their peers have directly benefited by reducing costs, their motivation to make deeper reductions grows considerably. Winbacks make the idea of constantly uncovering cost savings into a “business as usual” practice instead of a one-time campaign. Using winbacks to establish cost saving as a routine makes more aggressive steps like ZBB more palatable.

The business reinvestment process at Sydney Water is carried out in three stages:

  • Submission Stage — To receive funding for new projects, managers complete a one-page template describing the project costs and benefits.

  • Assessment Stage — A central assessment team evaluates the submissions based on strategy, costs and customer value, and helps prepare light business cases for preapproved projects.

  • Approval Stage — Light business cases are presented and discussed at the executive workshops. The executives then vote and give final approval to the best initiatives that deserve the funding.

By focusing on winbacks, Sydney Water is able to cut costs while still supporting innovation. As a result of value-based budgeting (VBB), Sydney Water surfaced $290 million in efficiency savings over a four-year period.

To drive business engagement and discipline in budgeting, the end goal should be value maximization, not cost cutting. To ensure the organization is aligned with the value maximization mindset, executive leaders must:

  • Emphasize value creation in the budgeting model’s title instead of calling it ZBB.

  • Start with operational goals rather than financial goals in budget reviews and discussions,

  • Rely on business-peer-driven spend evaluation to break down planning silos and optimize spend decisions across the enterprise

  • Highlight expected business winbacks over organization gains from the new model.

By focusing budgeting efforts on maximizing value, instead of purely cutting costs, businesses are more likely to collaborate toward a common positive outcome, thus increasing the chance of continuous cost discipline.

Recommended by the Authors

In response to the economic uncertainty unleashed by COVID-19, executive leaders are rethinking budgets for the rest of 2020. This research provides options to adjust budgets for short-term resource allocation decisions.

Current budgeting models fail to provide insight into costs, which can negatively affect the organization’s revenue and profit growth potential. This research explains why multimodel budgeting is critical for executive leaders to improve their understanding of costs.

Zero-based budgeting is increasingly imposed by executive leaders to rebudget existing costs, because business cases are needed only for new project spending. But the way many organizations apply ZBB to cost often misses the realization of business value. Without value, cuts must continue.

Changing business priorities in the wake of a recession means that executive leaders must reassess the services and capabilities they resource. Zero-based budgeting is a tool to rightsize budgets and shift resources toward value-added activities aligned to reprioritized business outcomes.

Endnotes

In 1Q20, inquiries about ZBB doubled against the same period in 2019, which were already up significantly from 2018.

Analysts:

Finance Research Team

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