Many people think of zero-based budgeting (ZBB) as primarily a cost-cutting approach. This view is understandable: it has helped multiple companies realize profound savings as they reallocate their spending to create more value.
But that’s only part of the story. ZBB’s laser-like focus on continually challenging the status quo also makes it incredibly effective as a change agent in organizations.
How? ZBB forces senior leaders and employees to distinguish between the activities that generate value from those that aren’t vital to the business. Rather than relying on budget history or assuming “that’s the way it’s always been, and it’s fine,” these conversations help to change workers from passive observers to active participants, working together to chart the company’s course. The result: a culture of continuous improvement.
Still, embedding this mind-set in the workforce isn’t automatic. It requires sustained effort, and communication is critical. McKinsey’s influence model highlights the importance of sustained communication to change mind-sets and behaviors. Here we highlight two approaches that leaders take to promote understanding and conviction among employees to create new, proactive culture.
Showing and telling
Companies that see ZBB’s benefits over time have embraced both showing and telling as critical aspects of culture change. At most companies, telling comes first: employees need to understand and be convinced of a new approach to budgeting. But efforts shouldn’t stop there for culture change to take place, and this is where storytelling among employees plays an important role.
For example, at one multinational manufacturing company that embraced ZBB, a regional salesperson wanted to see what would happen by purchasing lower-cost, more-functional store displays to promote products, instead of the displays they’d previously budgeted for. The new displays were popular with small retailers, which started contacting the company to have them placed in their shops. As sales grew by double digits, the salesperson became the resident expert on this new approach. The company decided to make the salesperson an in-house consultant, a position that allowed her to share her story and insights with sales teams in other locations.
The salesperson’s experience reinforced ZBB’s power in allowing people to find new, more productive ways to allocate resources.
Once the ZBB process sets budgets for each spending category, owners have a big incentive to meet these targets.
But, even with careful planning, departments may sometimes go over their budget targets. And the reason for overspending could be perfectly valid, but organizations still need to make up the shortfall—an exercise that can reinforce the benefit of ZBB.
For example, imagine a company faces claims of a product having quality issues. A sudden reputational crisis will create significant unplanned costs for everything from inventory write-downs and refund expenses to inspection of affected facilities.
In a zero-based environment, a business won’t have spare funds to transfer to other categories. Instead, the business head and category owners will have to get together and discuss potential trade-offs to free up funds. In this way, there’s no hiding costs or avoiding difficult problems. Leaders work collaboratively and creatively to prioritize and innovate.
Ongoing conversations among leaders about where the money is going, and why, constantly reinforces the values of the new culture.
Establishing a zero-based culture isn’t a onetime event. It’s a way of life, and its routines become part of the fabric of an organization.
Once employees adopt this engaged and rigorous mind-set, they can unleash a continual wave of performance improvement and value generation. And after a year, leaders at the highest-performing companies stop calling it ZBB: they call it “how we get work done.”
For more on the impact of ZBB on organizations, read the full article, “How absolute zero (-based) budgeting can heat up growth,” at Mckinsey.com.