Despite benefits UK companies slow to adopt zero-based budgeting

18 June 2018 Authored by Consultancy.uk

New research has shown that companies are reinvesting millions saved from zero-based initiatives into new growth. While the tactic has been used to drive growth around the world, however, the UK is lagging behind, as businesses stick with their short-term ‘cut the fat’ cost-cutting culture – something which could reduce agility and limit growth.

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses of a business or organisation must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organisation is analysed for its needs and costs. The methodology has been used by companies large and small to improve their agility, as it requires companies to “zero-base” everything they do, and regularly examine every process, asking, “If we could start over, would we want to do it this way?”

Now, research from the strategy arm of consulting firm Accenture has revealed that leading companies are realising savings of millions of pounds from the adoption of zero-based initiatives. The largest ever study on zero-based budgeting (ZBB), conducted by Accenture Strategy, identified 136 major companies that use a zero-based mind-set to reduce costs and reinvest for growth. 60% of those entities are presently in the top 2000 globally, and from this distinct set of companies, researchers analysed the scope, results and practices of ZBB programs, surveying 85 of the largest organisations around the world with in-depth examinations and executive interviews between November 2017 and January 2018.

Surveyed companies by year of program implementation

According to the paper, ZBB adoption has seen exponential growth in recent times – a 57% rise per year from 2011 to today – and of those who have since adopted the strategy surveyed, a 91% majority met or exceeded their financial targets since. Understandably, many more companies are attempting to follow suit and moving beyond traditional cost reduction techniques toward more holistic zero-based budgeting as a result.

As competition continues to heat in every sector of the global market, while new digitally savvy competitors eat into profit margins of established market incumbents, the current motivations behind companies adopting zero-based initiatives are the drive to improve profitability, at 96% of respondents, while just under half of those polled said it was in response to heightened competition, at 48%. Also cited was the need to drive growth (40%), something which UK companies in particular are struggling to achieve as the national economy continues to slow.

Problematically for Britain, the research did not point to the common perception in the UK that companies there turn to zero-based initiatives in crisis mode, M&A scenarios or as the result of pressure from private equity funds and activist investors. In fact, while adopting a ZBB approach could free up savings for investment, Accenture Strategy found that businesses in Britain are largely sticking by traditional belt-tightening approaches.

Jan Mueller, Managing Director at Accenture Strategy, said, “Adopting a zero-based mind-set can help UK organisations unlock significant savings which can be reinvested to accelerate growth and pivot to new digital business models. But many UK companies are still stuck using short-term ‘cut the fat’ cost-cutting programs which can do more harm than good to growth, reputation and employee satisfaction. ZBB is a smarter approach which gives companies forensic visibility into both spending and savings opportunities across all cost segments, so that savings can quickly be reinvested into high growth areas.”

Companies apply ZBB across the P&L

Being out of step with this particular trend leaves British business culture at a significant disadvantage compared to the global picture. While a large 92% majority of companies surveyed implemented ZBB strategies to reduce general and administrative costs, the study found that leaders are also applying the technique to other spend areas, such as sales and marketing (52%), labour costs (43%), and transportation and logistics (42%), finding savings on multiple fronts which can be reallocated to push businesses forward in new priority areas.

Zero-based challenges

In order to move beyond the short-termism of the past, UK businesses face a host of challenges. While the benefits of any change to a business can become increasingly evident due to the performance of competitors leveraging it, or various think-pieces and research papers proving it to be the case, cultural buy-in can limit its uptake. Among the firms surveyed 67% said that this was a major problem for them when adapting to ZBB, and in the UK, where a decade of austerity has seemingly hard-wired short-term cuts culture, and an aversion to investment, into the economic psyche of the nation and its businesses, this could present a particularly steep learning curve.

Elsewhere, change management (41%) and data visibility (33%) were also highlighted as key hurdles. However, once the initiatives are in place, participants confirmed to Accenture Strategy’s analysts that there is a common desire among their organisations to ensure they are durable, with 77% investing in control and monitoring to make the results of their zero-based initiatives part of continuous improvement.

Change management initiatives

Other techniques utilised by companies which have adopted ZBB might also provide the key to successful changes in the operational culture of UK businesses. 62% of respondents said training and workshops had played an integral role in change management, while 21% added that role modelling had also helped. Targets and incentives were cited by 15% of participants, though both the latter two methods focusing on materially changing behaviours were less popular among the surveyed executives.
 
Commenting on the uphill struggle faced by British firms to adopt ZBB, Naomi Hudson, Managing Director of Accenture Strategy, said, “With only a quarter of UK business leaders very confident that they will achieve their 2020 growth targets, ZBx can help free-up inefficient money that doesn’t support business strategy, and funds can be redirected to fuel priority investments. A zero-based mind
-set requires a cultural transformation that results in a change of behaviour. It must become engrained in how people think and work so that it begins to happen naturally.”

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