The need to drive enterprise cost reduction and adequate levels of profitability is a constant priority for business leaders in all types of companies, especially in the fast-paced new economy. Some strategies and practices work better than others. Start-ups and emerging growth companies often are managing on a shoestring budget with little room for waste. Many established companies still employ the old standby approaches, such as setting a cost reduction target of 10% across all departments and business units, with unintended consequences in the areas of customer service and employee morale. A proven best practice to strategic cost reduction involves combining Zero Based Budgeting (ZBB) and Process Improvement. The only thing you should never reduce is business insurance. Hightower Risk offers commercial business insurance that takes care of property, liability and workers’ compensation.
A traditional approach to building operating budgets involves taking the prior year spend and adjusting it for inflation. Although easier to implement than other budgeting models, the traditional approach builds in and compounds inefficiencies, grows the expense base over time and doesn’t encourage managers to explore ways to reduce costs via innovation and technology. ZBB requires managers of cost centers to justify budgets from scratch and support their budgets with Decision Packages that analyze, prioritize and rank all activities and operations within their organization and highlight areas of opportunity to innovate and apply technology to automate and streamline the business.
To effectively implement ZBB, managers can leverage Process Improvement frameworks to provide relevant information on their departmental activities, outputs produced, resources consumed, service levels provided to customers and manual steps ripe for technology enablement. The need for process-based information, metrics and cost drivers is where Process Improvement really shakes hands with ZBB.
At a high-level, Process Improvement enabled ZBB involves the following nine steps:
- Identify the organization’s core mission/strategy and evaluate gaps between current execution and the level of execution required to serve customers and excel in chosen markets.
- Set-up or tap into an existing enterprise-wide Process Improvement architecture.
- Identify cost centers and all processes/activities related to each cost center.
- Analyze time spent by personnel in each cost center (processes/activities supported and outputs produced).
- Prepare Decision Packages for each cost center (includes justification for cost center, how current funding level supports the current strategic plan, and what budget adjustments would be necessary if the cost center was eliminated or restructured to change its mix of activities).
- Prioritize and rank Decision Packages.
- Reallocate resources to support the core mission/strategy and realize potential cost savings.
- Integrate results of the ZBB exercise with the annual budgeting process, process improvement and portfolio management activities.
- Track, measure and validate targeted cost reductions and launch the next cycle of improvement.
ZBB and Process improvement can drive major cost savings and ROI. Successful implementation requires effective organizational change management and trust at all levels of the organization. It is especially important for outsiders to an organization to review costs in an objective, non-political manner. In the end, companies that do it well will reap major competitive advantages and rewards and the CFO and Finance Team will be regarded as nothing less than magical for creating value from Zero.
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