When many people think of zero-based budgeting, they think of its application when a company’s in a tight spot. When it needs to seriously reduce costs so there are funds to allocate to sustaining the business or embarking on a recovery strategy. The company dictates that every function within the organization must justify each expense for each new period – no building on or taking from a previous budget. In other words, every budget is built from a zero-cost base.
Sure, emergency or recessionary scenarios may be one context for zero-based budgeting. But our experience and research have shown time and again that a form of zero-based budgeting fuels the growth and strategic evolution of the healthiest companies, ones whose core strategies embrace the need to change constantly and be ready to turn emerging opportunities and unforeseen disruption to their competitive advantage.
I spend a significant amount of time thinking about how successful companies can always be ready to transform themselves to continue to stay ahead, and my colleague, BCG Partner and Managing Director Mark Austin, devotes a lot of energy to helping companies look at cost and investments. Together, we’ve seen that companies that weave a zero-based approach to budgeting into their DNA are the ones poised to navigate economic volatility with agility and the flexibility to invest at just the right times to seize new opportunities or turn other companies’ troubles into chances for growth.
When applied effectively by strong, nimble companies, zero-based budgeting, or to be more precise, “growth-minded zero-based budgeting,” practiced by leaders and companies that are always transforming themselves, pays off in big ways over time.
Boston Consulting Group analyses show that companies that implement large-scale change preemptively generated significantly higher long-term value than those that responded to situations reactively: In the three years after a transformation began, the preemptive transformers achieved an annualized total shareholder return that was three percentage points higher than that of reactive transformers. The return on investment of a preemptive transformation is about 50 percent higher than the ROI of a reactive transformation.
And growth-minded zero-based budgeting complements transformation champions’ strategic toolkit. It involves meticulously scrutinizing expenditures and often resetting budgets annually to ensure the efficient and effective use of resources. It is anything but blanket cost cutting. It integrates tightly with the company’s strategy and growth levers to distinguish between high-value adding costs and low-value adding costs – to reduce inefficient spending and redirect resources and focus to more strategic, growth-oriented uses and investments.
When applying growth-minded zero-based budgeting, nimble, winning companies and their leaders start by asking themselves three questions: What is our aspiration for the top line? What investments do we need to make to reach it? And how should we structure the cost base of the firm to enable those investments?
Because growth-minded zero-based budgeting classifies all expenditures according to their types, as opposed to point of origin, it brings once-hidden costs to light. This transparency allows the company to identify high- and low-value costs more readily and make strategic decisions about them. Organizational efficiencies follow as a result.
Most important, stand-out companies, the ones set to grow regardless of economic and market conditions, do not regard growth-minded zero-based budgeting as a one-time exercise. Rather, they make it a way of doing business and infuse it into everything they do.
If, or when, a downturn occurs, a company that has sewn growth-minded zero-based budgeting into its strategic and operational DNA is primed for growth, as opposed to scrambling to shore up operations. The company is positioned to maintain its marketing engine, continue to carry out internal improvements, continue to pursue innovation and double down on M&A opportunities that the downturn presents.
Of course, companies can’t adopt growth-minded zero-based budgeting with the stroke of a pen or by just setting up working groups. And the C-Suite can’t delegate it. It is as much a mindset as it is a way of working. For companies where it is not already in place, growth-minded zero-based budgeting can’t take hold without a cultural change at the company. Therefore, the CEO and CFO must be actively involved. They not only need to determine, and express, why the approach should be adopted, but also to articulate how it will contribute to the company’s long-term growth. And then they must be unflinching in exercising its principles.
Needless to say, shifting the culture so it reflects and supports growth-minded zero-based budgeting requires a major initiative, driven from the top, in a thoughtful, empathetic way. Leaders and top managers need to establish and convey the message around the rationale; identify the people who will be most involved in and affected by the new focus and create a plan for involving them and develop levers and programs that will help shape the right organizational context and mindset.
When adopted in the right spirit, growth-minded zero-based budgeting can help successful companies increase and maintain their strategic momentum, regardless of economic conditions. In fact, this kind of transformation could very well be the most important way a company strengthens itself, both offensively and defensively.
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