This guide will help executive leaders implement a zero-based budgeting (ZBB) process to reduce costs by eliminating redundant or unnecessary activities, shifting resources toward value-added activities, and creating a culture of cost transparency and accountability.
*Time refers to the total duration for completing the activity end-to-end.
**Effort refers to the total number of FTEs required to execute the activity.
Essential Steps marked as Essential have been identified as critical for the successful execution of this project.
This research has been adapted from , which can help finance leaders implement a ZBB process to reduce costs.
Lay the groundwork for the ZBB process, and ensure all participants understand their responsibilities, the process, timelines and desired outcomes.
Executive leaders leading the effort to create a ZBB for the organization must:
Commit to ZBB implementation in the organization.
Drive an understanding of the organization’s strategic priorities for the year among stakeholders involved in the process.
Collaborate with the HR and finance functions to issue a formalized, organizationwide set of budget assumptions, such as wage and salary increases for the coming year.
Review Figure 1 to understand the ZBB decision tree.
Establish a ZBB implementation team and provide training resources to educate the business unit heads and functional heads on the ZBB process.
Ensure the ZBB implementation team includes representatives from different business units and functions. Clearly define the team’s roles and responsibilities.
Support the ZBB implementation team in conducting training sessions with business unit heads and functional heads to help them understand the ZBB process, expected outcomes, their role in achieving them and timelines to prepare and submit the ZBB.
Develop decision packages for documenting costs and benefits, and prioritize them based on their criticality to business performance. Create innovation proposals to receive funds generated from cost-saving opportunities.
Ensure the ZBB implementation team collaborates with each business unit and function to create a list of ongoing and planned activities and innovative projects for the year. While listing the activities, map them into categories that will help in the prioritization process (see Figure 2).
Once the list of activities has been created, the ZBB implementation team must work with business units and functions to identify nonessential activities that can be eliminated and inefficient activities that can be modified to free up resources. Executive leaders must ensure their direct reports support this exercise with data and guidance on how to weigh savings against risks introduced by modifying inefficient activities.
Help business units and functions determine the resource requirements for performing each activity and implementing the innovation project(s). Cost estimates should include personnel costs (including benefits), associated capital expenditures, and associated general and administrative (G&A) expenses.
Assist business units and functions in documenting the costs of performing the activity, service levels and performance metrics, alignment with business objectives and risks of not funding the activity. Also, help them create proposals for innovation projects, documenting project costs benefits and the need for implementation.
The ZBB implementation team must ask heads of business units and functions to review the decision packages and rank each activity based on its contribution to the business’s or function’s objectives. The activity must also include an evaluation of the financial implications of implementing the innovation project. Use the prioritized list to reallocate resources and revise the budget.
Work with your direct reports to drive consensus throughout the organization on spend decisions and new innovative initiatives. Ensure the HR function addresses all employee grievances with respect to change, as a result of the ZBB process.
Facilitate a workshop with the heads of business units and functions. The objective of the workshop must be to evaluate the budget for cost-reduction and productivity-improvement ideas, and allocate funds generated from the identified cost-saving opportunities for funding innovation projects. Refer to Figure 3 as an example of the aforementioned workshop.
After assessing business unit and function budgets, the ZBB implementation team must evaluate all innovation proposals to allocate funds from the cost-saving pool. The criteria for allocation decisions must include strategic fit, customer value and growth opportunity. The team must ask each business unit and function to update its budget based on the cost-allocation decisions made in the workshop.
Review the consolidated budget shared by the ZBB implementation team and share your feedback on the cost estimates and resource allocations within each business unit and function. Validate the revised budget and finalize it for presentation to the board.
After completing the ZBB process, execute the process-improvement initiatives identified during the budgeting exercise and monitor performance on budget targets.
Assess the effectiveness of the budgeting process.
Solicit feedback from key stakeholders involved in building the ZBB.
Compare actual results with the budget periodically.
Revise the budget to reflect business and market changes.
Sustain ZBB beyond the budgeting cycle by initiating strong monitoring mechanisms to drive an ongoing adoption of value-based spending.
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