Strategic cost management with agile zero-based budgeting
As chief financial officers reckon with the massive disruption of the business landscape, many are seeking ways to reduce operational costs without compromising plans for growth or the potential benefits of the post-pandemic economic recovery. Agile zero-based budgeting (AZBB) has emerged as an effective tool for reevaluating the budgeting and planning process. Like traditional ZBB, agile ZBB requires every area of the company to analyze its needs and costs when building a budget for a specific period. But where traditional ZBB can be complicated and time-consuming to implement, agile zero-based budgeting offers a modular approach that can produce results faster while streamlining processes and minimizing complexity.
The Hackett Group® offers deep expertise in agile zero-based budgeting. With extensive experience in improving performance through strategic cost optimization initiatives, The Hackett Group can guide companies through the process of determining where and how to implement ZBB in order to maximize potential value.
What is agile zero-based budgeting?
Traditionally, companies have used zero-based budgeting as a cost management tool. In contrast to incremental budgeting methods that simply increase or decrease baseline spending from a previous period, traditional ZBB builds a budget from scratch for each period. Every expense must be justified and evaluated for its value to a program or to the business.
The challenge of traditional ZBB is that it requires an enormous amount of documentation and planning that can take months to complete, sacrificing agility and speed-to-market along the way. An agile zero-based budgeting process offers a more effective alternative, allowing organizations to realize quick results by applying a targeted approach to ZBB.
With AZBB, budgeting begins with the areas of highest priority first – for example, functions or business units that have greater variability in costs – enabling budget teams to capture easy wins first. AZBB is applied selectively to different parts of the organization on a rolling basis, delivering results faster while allowing budgeting to stay aligned with the company’s long-term business strategy. Ultimately, agile zero-based budgeting can help target cost-efficiency improvements by focusing on true cost drivers and deciding which to address first.
Benefits of agile zero-based budgeting include:
- Improved cost transparency
- Cost structures aligned with new business realities
- Easier to roll out
- Accelerated delivery of expected cost savings
- Cultural mindset focused on financial performance management
Agile zero-based budgeting with The Hackett Group
The Hackett Group is a strategic consultancy and leading enterprise benchmarking firm for global companies, offering services in digital transformation, implementation of leading enterprise cloud platforms, workflow automation and advanced analytics that enable Digital World ClassDigital World Class® performance.
In our experience, the radical redesign of cost structures involved in agile zero-based budgeting can achieve substantial savings. Our team is highly adept at helping organizations understand the value of agile ZBB initiatives and deciding where and how they can best be applied.
In our approach to agile zero-based budgeting, we help organizations implement an eight-step process.
- Diagnosis. Develop an approach to ZBB that is aligned with each company’s business objectives, organizational model, accounting structures and systems.
- Value-based prioritization. Identify and prioritize each unit of the business (by function, region or units with the highest variable costs), and calculate the value that agile ZBB may offer in each area.
- Expense structure analysis. Develop clear insight on relative spending levels by mapping expense into cost categories by business unit and function. This reveals expense drivers and establishes price and consumption levels.
- Target setting. Identify opportunities for cost savings, as well as needs for investment. To set top-down targets per cost category, we establish cost driver rates and consumption levels.
- Budget creation. Build a bottom-up budget starting from a base of zero by business unit function that is aligned to performance targets.
- Analysis. Pressure-test the zero-based budget by analyzing cost drivers, benchmarking performance levels and confirming compliance with policy guidelines.
- Alignment. Ensure that ZBB is aligned with business growth objectives by conducting reviews with cost category owners and budget holders.
- Monitoring. Ensure that targets are met through ongoing cost management, capturing deviations from budget, establishing corrective action plans and identifying opportunities to secure additional reductions.
Best practices for successful implementation
To help companies successfully implement AZBB, we offer a proprietary framework that moves organizations from cost-awareness to sustainable strategic cost optimization. Our best practices include:
- Educate and gain support of senior leadership.
- Identify savings opportunities through detailed analysis.
- Identify units of business with the greatest opportunity to derive value through AZBB.
- Establish detailed targets for cost categories across the organization.
- Use internal and external performance benchmarks to build a mentality of continuous improvement.
- Engage key business stakeholders in planning to make sure they understand how cost drivers support business growth objectives.
- Deliver training and communication to ensure all parties understand the process and apply it consistently to manage costs more effectively.
- Implement technology, such as cloud-based financiasl planning and analytics software, to reduce the administrative effort of the agile zero-based budgeting planning process.
Why customers choose The Hackett Group?
The Hackett Group is a leading global strategy and operations consulting firm. Our services and insight are built on unparalleled IP developed through more than 25,000 benchmark studies with the world’s leading businesses. These include 97% of the Dow Jones Industrials, 94% of the Fortune 100, 70% of the DAX 40 and 51% of the FTSE 100. Providing dedicated expertise in business strategy, operations, finance and other areas of business, we help clients to accelerate digital transformation, manage working capital and optimize global business services.
When transitioning to an AZBB model, we provide companies with:
- Experience. We offer deep, practical experience in finance transformation based on hundreds of projects that span a variety of enterprise environments and industries.
- Expertise. Our experienced consultants specialize in cost optimization and performance improvement in SG&A expenses.
- Insight. With unparalleled benchmarking data, we deliver invaluable insight, certified best practices and proprietary resources harvested from our work with world-class performers.
What is zero-based budgeting?
Zero-based budgeting is a technique where all expenses for each new budgeting period must be justified and analyzed for their needs and costs. Expenses are not carried over from period to period, but rather are constantly reevaluated for the value they offer the organization.
What is the value of zero-based budgeting?
Zero-based budgeting can help reduce costs by avoiding across-the-board increases to the budget from a prior period. With zero-based budgets, decision-makers are forced to constantly evaluate the need for and value of each expense and are not tied to limitations of previous assumptions and past targets.
What is agile zero-based budgeting?
Because zero-based budgets tend to be more challenging to implement and more complex to manage than traditional cost-based budgets, many companies have turned to agile zero-based budgeting methods to reduce effort and achieve results faster. Agile ZBB is a modular approach to budgeting that budgets high-priority areas first before moving on to other parts of the organization.