By Sarah Whitty
In the current economy, many industries are experiencing slow to no growth and companies are looking to new and creative ways to cut costs.
To do this, there are two primary approaches many companies are taking.
The first involves Target Cost Cutting which focuses on trimming indirect costs or outsourcing business processes. This more traditional approach, which works under typical circumstances, forces management to justify what to remove to realign costs.
However, some industries go through disruptive change more often and may need a more comprehensive approach. This would be when the Zero-Based Budgeting approach is more effective.
Zero-based budgeting (ZBB) is a budgeting process that starts at zero and allocates funding based on program efficiency and necessity rather than budget history. Each year is a new playing field with every line item requiring justification for the betterment of the business. This approach forces management to justify which costs to keep.
ZBB can help companies to radically redesign their cost structures and cut as much as 25% of their spending on overhead and support functions, while boosting efficiency and competitiveness.
Not surprisingly, this shift in mindset requires a culture shift within the organization that may be a struggle. Companies become leaner with increased span while decreasing layers within the organizational structure. Typically there is a step-by-step approach to implementing successful ZBB programs, and when done well, ZBB makes cost management a part of the way every employee works on a daily basis.
Some advantages of ZBB that we’ve seen firsthand is that the resulting budget is well justified and aligned to the overall strategy of the organization. It helps to create broader collaboration across the organization from all layers and supports cost reduction by avoiding automatic budget increases, usually resulting in overall savings.
Some disadvantages that we’ve seen with ZBB is that its costly, complex, and time consuming to implement given that the budget is rebuilt from the ground up annually. It can be a risky shift when potential savings are uncertain and requires specialized training or personnel to accomplish. These additional resources and requirements can harm organizational culture or brand image.
From a marketing perspective, we see ZBB as a useful tool for maximizing ROI by helping brands to streamline and focus on the key initiatives of their business strategy. It’s also important to remember that when implementing this approach, it is essential for you to maintain the essence of your brand without having it end up on the cutting room floor.