Zero-based budgeting (ZBB) is a system that requires managers to justify all expenses afresh with each new year.
I first encountered this in the mid-Noughties with a client suddenly swamped with execs from their Dutch parent.
It wasn’t so much that the discipline was a complete mystery to the subsid. It was that it did not seem to value initiatives that were strategically important, small but significant or more slow burn.
When coupled with the perception that the incoming enquirers considered ‘the cost of everything, but value of nothing’, alongside a dismissal of the knock-on, enabling or collaborative affect of certain spend, punches flew.
Here’s investopedia’s ‘key takeaway’ bullet trio;
- ZBB differs from traditional budgeting in that the companies that use it create a budget for each new period.
- The benefits of this method include that it can lower costs by keeping old and new expenses in check.
- Potential disadvantages are that it can reward short-term thinking, be resource-intensive, and could be manipulated by savvy managers.
As the general shift from CapEx to OpEx has occurred, this type of treatment has become slightly less troublesome for the solution seller. As we can all hopefully easier justify the pleasures unleashed from the smaller monthly rentals compared to one-time huge hits.
Yet dangers lurk close to the surface.
The classic TCO arguments, day-one cost versus on-going ones and making the most of any investment longterm can be waved away by a present-day focused, ego-driven ZBB zealot.
What can emerge is less a genuine attempt to rein in unnecessary spend, but a jackboot under which to sublimate managerial independence.
I remember myself the utter waste of time and energy of which re-assessing alternative supply distracted key personnel.
The costs of both such re-evaluation and any resulting switching of vendors totally obliterated any perceived spreadsheet saving.
Whilst there is something to be said for an attempt to rebalance the emotional (as in any decision choice) with the tangible (as in, hard-nosed financial returns), having to constantly re-justify something to the nth degree to the numbers crew tends to stifle, not stretch, results.
How, you wonder, and perhaps more critically, to whom do these people prove the worth of their often exorbitant salaries?
The salutary lesson has long been in store.
Ask prospects early how project success is measured.
And remember that this can be (usually is) very different from the reason they will buy in the first place.
Box off both, and you’re on to a winner.
When ZBB can become SBB. S as in Success.