FINANCE & MANAGEMENT

ZERO-BASED BUDGETING

Implementation of an annual budgeting process that requires organizations to justify spending from the bottom up (zero-based); thereby verifying that all components are relevant to the strategic goals and not just based on historical expenditure

What challenge(s) do our clients face?

Sometimes, the benefits of a standalone cost reduction project are short-lived and a fundamental shift in culture and ways of working is required

In today’s highly competitive business environment organizations of every size are being pushed to continuously look for opportunities to increase the efficiency of their resources. In moments when a punctual intervention is needed, often a standalone cost reduction project can deliver the necessary outcome. However, the organization often finds this benefit is short-lived, and costs again start to rise after a period.

In the pursuit of more long-term and sustainable cost reduction efforts, many organizations have turned to Zero-Based Budgeting (ZBB). ZBB is a methodology that requires organizations to build their annual budget from zero each year. Each line of cost must be justified in order to receive funding and is not guaranteed simply based on the fact that it was included historically. This allows organizations to develop deep visibility of cost drivers and uncover areas of inefficient spending, allowing them to reinvest in initiatives that more directly support the company strategy or long-term goals (e.g. product development or sustainability).

Shifting to ZBB is not an easy task however; the process itself is time-consuming and complex when compared to traditional methods. It is a methodology that requires a shift in mindset and culture, as much as it requires processes and tools to achieve it. When implemented incorrectly it can lead to negative impacts on employee morale if cost center owners are too strict or the process could be deprioritized by package leaders if it begins to consume more time in their agenda than their own core activities.

How do we help?

We help companies implement and define governance to sustain a Zero-Based Budgeting methodology that is technically strong while promoting a positive efficiency mindset.

For organizations aiming to establish a system of ZBB, we help across a holistic journey from:

  • Understanding how to apply the methodology.
    • The concepts of carrying out ZBB are very different from traditional budgeting methods. We help organizations first to understand that a ZBB process requires a matrixial relationship between ‘Package leaders’, who are responsible for one expense package (e.g. travel expenses), and Cost Centre Owners, who are responsible for the cost of an area (e.g. the trade marketing manager). Furthermore, the ZBB changes the responsibility of the Finance area from one which just builds to the budget, to the party responsible for running the process and challenging all expenditures.
  • Putting in place the processes and governance to run an annual budget cycle
    • We design a budget and forecast process and governance attuned to your organizational needs and culture that makes clear the roles and responsibilities of each professional (Package Leaders, Area Leaders, Finance Area, etc.)
  • Undertaking a budget cycle together to identify saving opportunities
    • We build with you next year’s budget defining all cost and expense lines and identifying the list of savings possible in this first cycle. We use our experience to perform technical challenges, questioning all levers to reduce costs and gain efficiency, whilst supporting stakeholders in building knowledge and understanding of the process.
    • In our projects we tailor the aggressiveness of the debates accordingly to the company culture and financial moment
  • Embedding the change
    • We understand that a ZBB is more than just a project, it is a change in mindset. In order for this change to be successful, it is key to establish the new expected behaviors, communicate clearly the new roles of all functions and have the commitment of top management to oversee, reinforce the concept and solve inevitable clashes.
    • During our projects we make sure the company understands this challenge and is prepared with the correct mindset and expectations for the transformation ahead, removing consultancy dependency later down the line.

What are the benefits?

The benefits of a ZBB project go beyond the short-term cost reductions of an adjusted budget. It embeds in the company a new capability to challenge costs with a scarcity / critical mindset leading to:

    • A clear understanding of the company costs and rational for spend
    • Reduction of costs across the entire base (SG&A, operating, outsourcing, marketing, etc.)
    • Ability to reallocate inefficient spend towards initiatives better matched with the company strategy or long-term goals (e.g. product development or sustainability)
    • Greater ownership regarding company costs – the finance area will not be the only responsible party for the budget
    • Development of an efficiency mindset and cost management culture
    • Less one-off cost reduction projects which can be disruptive or ineffective
    • A stronger and more interdependent governance with clarity on timing, analytical depth, and roles for budget

How does it work?

Combining our experience of the methodology with your business knowledge, we can build together a Zero-Based Budget aligned with the company strategy, which brings both short-term savings and enhances the ongoing management of cost for the future.

We are convinced that our clients know their business better than anyone else. At the same time, we provide outside experience, proven methodology, cross-industry benchmarks, and a change management approach that can support our clients in transitioning to ZBB with accuracy and leadership involvement, without disrupting the business.

To build up a Zero-Based budget, we take a step by step approach that ensures we understand the company culture and business process; propose a tailored step solution grounded in reality that involves the leadership throughout the process; and that guarantees change management to create or reinforce the efficiency culture. This typically translates into 4 project phases:

2 1 ZBB relies on a matrixial relationship between ‘Package leaders’, who are responsible for one expense package (e.g. travel expenses) and Cost Centre Owners, who are responsible for the cost of an area (e.g. the trade marketing manager). Here we design the processes and governance (approval gates, validation committee etc.), outline the roles and responsibilities of Package Leaders and Cost Centre Owners, and define and train the staff assuming the roles. Prepare the Zero-Based Process: 3 By analyzing historical data, understanding the current budget making and review process and by conducting interviews with the leadership we build our understanding of the company-specific strategy and cultural changes required. This will allow us to agree the project goals, hard number objectives, dynamic and speed of implementation. Understanding the status quo and setting the ZBB objectives: 4 Finally, we consolidate all packages and analyze all cost lines splitting the budget into the two dimensions of packages and cost centers. The owners then present the budget to the C-Level with the concrete explanation and rational of the numbers. Revision and approval: We work side by side with the Package Owners and Cost Centre Owners to trial the process, defining the resources needed per budget line and identifying efficiency opportunities. We challenge the results with our internal and external benchmarks, bringing market policy best practices. This phase provides an opportunity to clarify any doubts about roles, promote the efficiency culture within each group and also advise leadership about issues to be solved among areas / people. Here we can use client tools or construct temporary tools that can be transformed into more robust systems in the future. Run the new budget process and challenge the numbers:

To ensure the success of the project, we believe that the process must be a co-creation journey with our client’s team, involving not only the financial department but also defining the package owners from other areas to be part of the process. This co-creation is fundamental to (a) guarantee that the opportunities mapped during the process will reflect the reality of the business, (b) that each package will have a professional with the responsibility to identify opportunities and implement them during the next year and (c) that the company will be able to run the budget process going forward, fully understanding the method.

SUCCESS STORIES

CHALLENGE

Our client, a large medical company wanted to standardize the budget process among its more than 30 hospitals, understanding from a demand basis the real need for medical assistants (nurses, receptionists and paramedics) and administrative personnel at each hospital.

APPROACH

We developed a ZBB process and tool that allowed the company to understand the cost base in detail and determine the appropriate staffing per hospital. Fundamental to the success of the process was the careful selection of professionals with the appropriate technical background to rationalize the costs. We selected Package Owners that were business people (for finance functions or insurance for example) and also doctors (for medical devices or disease protocols).

RESULT

Through the project, we were able to identify not only staff savings of 20% but also to better balance the staffing needs among the different locations. After the first budget, the company continued to use the new process and tools not only to run the hospitals’ budget but also to forecast the staffing needs for new ones.

CHALLENGE

Our client, a financial organization, identified after their annual strategic planning that they needed to significantly reduce costs to improve profitability and achieve their strategic goals. The organization did not have a ‘lean culture’ and so the company leaders identified a need to make a more fundamental change to drive efficiency throughout the business.

APPROACH

Working with the CEO and board we defined the minimum cost reduction target needed to deliver their strategy. From here we set about working with all areas of the company to establish a robust ZBB process that would deliver a change in mindset as well as budgeting/forecasting process.

Package Leaders and Cost Centre Leaders were defined and trained, and we worked closely with all areas of the organization to make clear the new roles and responsibilities of these parties. We then supported these leaders to carry out the budget, mapping the opportunities in each cost type and area.

RESULT

Together with the client teams, we identified opportunities that reduced costs and expenses by 20% when compared to the last year. A new forecast governance supported the company to monitor the capture of these opportunities over the coming years and embed the cultural change.

CHALLENGE

A national beauty company was seeking to improve its budgeting process and reallocate inefficient spend towards initiatives better matched with the company strategy. The existing process was centralized within finance, with a lack of oversight and involvement from the business unit and regional leaders, who were driving the costs, making improvements difficult to identify.

APPROACH

We supported the company in developing a ZBB process and governance that would increase visibility and ownership of costs. For example, we selected a manager from each BU to be responsible for cost packages that pervaded across all units (e.g. Travel expenses). In this manner this we connected them towards the same goal and guaranteed that all leaders had a cross-company perspective.

RESULT

We implemented and embedded a new budget process and forecast governance, which involved and connected the corporate areas, regions, and business units. Running the budget cycle with the client allowed us to identify multiple improvement opportunities which reduced expenses by more than 10%.

OUR INDUSTRY EXPERIENCE

Integration has had the pleasure of working with companies across different sectors such as Personal and Home Care, Home Appliances, Construction, and Financial Sector.

Working across industries our professionals have developed an understanding of the market dynamics, best practices, and client/consumer needs across industry segments. This allows us to bring robust and customized solutions to our clients that take into consideration the internal and external context.

TALK TO US

Alejandro Martinez

Alejandro is a Managing Partner in our Mexico operation. Alejandro has spent over 20 years within consulting, as well as within Industry, having been factory manager and chief of production for Kimberly-Clark. He has worked extensively across Mexico, Latin America and the United States developing deep experience in Consumer goods, Retail, Manufacturing, M&A and particularly [...]

Carolina Flores

Since 2010 Carolina has been working in our Finance & Management practice, helping our clients across industries achieve important transformations. She has often been involved in projects of large and international scale supporting organizations to achieve their financial objectives through efficiency programmes, Organizational Structure changes, Synergy Evaluation and PMI to name a few.

Gerard Schoor

Gerard is a Managing Partner and has overseen the Mexico City office since 2008. Prior to Integration, Gerard accumulated 25 years of experience in executive positions at L’Oréal, The Colomer Group and Unilever in Europe, USA and Latin America. He has led global projects related to Organizational Development, Market Entry Strategies, Industrial Management and Strategic [...]

Hugo Ribeiro

Hugo is a Founding Partner at Integration and can count on more than 30 years of experience in consulting. Hugo, who holds a post-graduate degree in Business Administration from Harvard University, is a senior specialist in the area of Finance & Management and frequently leads projects in Organizational Structure, Strategic Planning, M&A, Improvement of Productivity, [...]

Jorge Gomes

Jorge is a highly experienced professional in our Finance & Management practice having joined Integration in 2008. Jorge has travelled to countries around the world in support of our clients, leading projects related to revenue management, strategic planning, M&A and more. He has a well-rounded experience having completed multiple projects for clients across sectors including [...]

Lucas Tavolaro

Lucas joined Integration in 2011 and found his home in our Finance & Management practice. He has supported our clients in the creation Strategic Roadmaps, M&A synergy evaluations, Go-to-Market strategies, Cost Efficiency and Strategic Sourcing projects. His experience includes sectors such as Consumer Goods, Construction & Property Development, Education, Private Equity, Oil & Gas, and [...]

Luis Bernal

Luis is a Manager in the Marketing & Sales practice. Originally from Columbia, Luis is an entrepreneur at heart, and has worked in several start-ups in Colombia, receiving his MBA from IPADE. He has accumulated international consulting experience whilst working across the United States, Mexico, Caribbean and Central America, Colombia and Brazil in industries such [...]

Quentin Girard

Since 2013 Quentin has worked in our London and São Paulo offices specializing in Finance & Management projects. He has led engagements across a wide array of countries in Europe, South America and Central Asia. His primary experience includes projects related to Route to Market, Cost Efficiency, Cost-to-Serve and Strategic Roadmap Design, in sectors such [...]

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