We have noted an increased interest in Zero-Based Budgeting (ZBB), which some of the large and established consultancies continue to promote heavily. With this short note, we would like to answer some of the questions we often receive about ZBB and explain how it compares with Beyond Budgeting (BB).
At first glance, there is nothing wrong with the purpose of ZBB; and the concept is well-presented. Here are some typical statements:
- ZBB eliminates waste and reduces costs (by budgeting from ‘zero’ every year).
- It leads to an improved allocation of resources (freed-up cash is redirected to support goals and fuel growth).
- ZBB is about agility (more cost-efficient and competitive).
- It changes the company DNA to one of sustainable cost management.
Some of these statements are also used about BB so it is easy to be confused and want to compare the two.
A closer look, however, reveals that ZBB and BB are diametrically opposed approaches, based on incompatible worldviews and ways of thinking.
It is claimed that ZBB leads to substantial cost savings, and we are indeed aware of several such cases. In all of these, however, we would argue that the savings were mainly the result of focusing on and scrutinizing the companies’ actual costs; i.e. increased visibility and better data quality. This is extremely important and it typically marks the start of a ZBB project.
However, we also encourage companies to ensure a high level of data quality before embarking on a BB journey. But this has little to do with ZBB (or BB for that matter)! This is merely common sense, and neither ZBB nor BB should be credited with getting the basics right.
With ZBB, the company continues to prepare detailed budgets on an annual basis (or sometimes more frequently). These budgets are based on top-down targets from cost category owners. This has many drawbacks:
- It does not reduce the enormous amount of resources spent on preparing budgets (on the contrary).
- Fixed and detailed budgets do not fit with dynamic and unpredictable environments.
- Cascaded targets remove decision-making from the front-line and go against local accountability.
- Cascaded targets lead to rigidity and complexity.
- The structure of cost category owners adds further to the complexity.
Despite the hype, ZBB does not at all address most of the problems associated with traditional budgeting – for example:
- Budgeting is a very time-consuming process.
- Budgeting stimulates undesired behaviour.
- It creates an illusion of control.
- Decisions are made too early and often too high up.
- The budget is a poor yardstick for evaluating performance.
Further, and with reference to the 12 BB principles, ZBB hardly addresses the leadership principles, nor the problems associated with how to define and reward performance.
ZBB is not ’new’ and ’sexy’. It was a bad idea when it was invented and thrown out of the house in the 1970s and it is an even worse idea today.