Imagine a beverage company, which following several years of strong organic and M&A driven growth, finds that its organization and cost structures are now presenting risks to future growth. Add to that external pressures – rising input costs, increasing customer demands and new business models – and the company realizes it needs to adopt a fundamentally different management model – one that resets its ways of operating and puts strategic business imperatives at the forefront.
This scenario is playing out across sectors as companies are faced with competitive disruptors. The result is that profitable growth is harder to come by than ever before, and responsibility for future growth and competitiveness cannot solely rest on the shoulders of the C–suite. Boards must also step up to work in tandem with executives in overseeing the execution of more holistic, sustainable corporate strategies. In almost every case, the ability to free up and reallocate funds for growth strategies will be essential to success.
Enter zero-based budgeting (ZBB) – a simple, but progressive approach centered on starting budgets from zero every year instead of basing them on the year prior. ZBB is not a new concept, but the strategy behind zero-basing has evolved significantly in the last several years to become what Accenture Strategy calls ZBx. The zero-based mindset applies across the organization from the front office to the supply chain and back office. The strategy creates unprecedented levels of visibility into how companies are spending resources. It allows companies to put their money where it matters.
Focused on value using unprecedented levels of visibility to expense, ambitious top-down targets informed by benchmarking, and rigorous governance, ZBx drives effectiveness that can significantly increase shareholder returns. With the board’s oversight, a zero-based mindset can help companies build lean, profitable business models that strengthen today’s core while also stepping into tomorrow to move ahead of the competition. In many cases, this means businesses may receive more investment than they did in a pre-zero-based state.
For example, one health provider is applying zero-based planning models to focus and align investments in capabilities required to drive a 25%+ planned revenue increase over three years. A food company is using zero-based strategies as the governance mechanism to oversee the strategic redesign of the operating model. A pharmaceutical company is using zero-based methods to fund building increased resiliency into its sources of supply. In each case, these companies are emerging as more competitive than today
Board members are increasingly seeing zero-based strategies as an enabler to its most important priorities. It is a management model as vehicle for becoming competitive in a highly disciplined manner, and many boards are taking a leading role in initiating zero-based programs. This is often driven by dissatisfaction with traditional cost interventions or foresight into future risks. For instance, Accenture Strategy research has shown that only 36% of executives believe their current cost reduction efforts will be sustainable, and only one-third believe investment decisions align with their company’s business strategy and future growth. Board oversight is critical to mitigating these risks.
Take a multi-national retailer as an example, where the board is working with the management team to expand the adoption of the zero-based mindsets across stores, supply chain and the broader organization to significantly increase capacity into digital and experience related investments. Faced with the need to disrupt today’s status quo in order to fund investments for tomorrow, the board has worked closely with members of management to evaluate opportunities, provide reinforcement for shifts in culture and help measure progress against a multi-year journey. This oversight provides more than a check and balance – it is an accelerator of impact.
As boards become more active in securing a leading role in shaping cost transformation, the following steps can help increase impact:
- Secure buy-in from management. Emphasize how bolder, more strategic cost programs are needed to unlock funds for growth and make the best reinvestment decisions. And support reinvestment. One company put it the following way: we will spend one-third of the savings on our growth plan, one-third will go back to shareholders and one-third will be invested in our people.
- Hardwire ZBx into the culture. Create a healthy tension to strives for continuously push the CEO and CFO to clarify the role of cost management as part of the corporate strategy. Encourage governance models that create visibility to progress and tension related to the ability to push further.
- Institute a cross-functional approach. Board members should recognize that zero-based programs are not only financially focused. They are cross functional – drawing in broad operational impacts across areas such as sales, marketing, supply chain, product development, etc. Drive the scope to include the full P&L of the enterprise over time.
- Remember that zero-based strategies are not a quick fix. Boards must be willing to put in the time and necessary due diligence to reap the rewards. Connecting cost transformation to re-investment priorities goes beyond financial or operational transformation – it’s often a deep cultural shift that requires fundamentally new mindsets and behaviors across the leadership team and broader organization. While there will be significant near-term impacts, this is a multi-year journey to support corporate strategies.
Growth is a management responsibility at its core, and cost transformation is an essential enabler. Boards have a major role to play in instilling a more disciplined, holistic approach to management, which will be crucial in the digital age. Those who succeed in breaking institutional norms in favor of bolder, more sustainable cost strategies will be best positioned to win.