Zero-based budgeting (ZBB) is a proven strategy to improve profitability by holding each department/cost-center owner responsible for justifying all their major budget line items instead of just inflating the prior year numbers. ZBB shouldn’t be performed outside a corporate performance management (CPM) system (i.e. don’t use excel). CPM systems connect disparate data sources for automated budgeting/forecasting/planning, reporting, consolidations and analysis. Planning time is typically reduced 50-70% when CPM is utilized, allowing key stakeholders to focus more time on more analysis instead of data entry.
Recently in the news, there has been a number of articles on the Heinz and Kraft Foods merger. Heinz, currently backed by Warren Buffett and 3G Capital (a private equity firm), is merging to establish Kraft Foods Group in a $46B deal to create the third-largest North American food company. Maturing, mature and recently acquired companies (i.e. add-on deals) such as Heinz and Kraft are prime targets for expense optimization via ZBB. Under the guidance of Warren Buffett and 3G Capital, Heinz leveraged their proven track record of implementing ZBB to reduce the workforce by 4% amongst other profitability enhancements. The newly merged food group has a target set to reduce costs by $1.5B via ZBB over the next few years. While ZBB isn’t a new concept, the execution of it can be reduced in time by 50-70% when CPM technology is introduced.
CPM technology connects disparate data sources for automated budgeting/forecasting/planning, reporting, consolidations and analysis. Our leading clients no longer plan or analyze results in excel. They use advanced technology designed with a user interface for finance and operations professionals. With this technology, IT no longer has to manage the application and/or reporting. The primary benefits of CPM include reduced time and effort, increased automation, faster results, powerful analytics, improved risk management, enhance organizational alignment and a single source of truth for data.
Our experience with ZBB has taught us it truly promotes accountability of actions by the individuals responsible for their departments/cost-centers, resulting in profitability improvements. We recommend each organization embarking on this budgeting technique truly review the value of granularity at which this technique will be executed. Additionally, another area that can often be a hurdle when implementing ZBB is whether or not your organization is using a top-down, bottoms-up or some combination of the two target setting approach. We have also found that organizations who are still budgeting/planning in excel and not using modern budgeting techniques (i.e. ZBB, rolling forecasts) are being left behind as their competitor’s success outpaces their own.