Zero-based budgeting feels like one of those trends that is potentially pretty significant but which few people are talking about. I seem to be coming across it more and more. It's no doubt sprung from the increasing pressure that marketers are under to demonstrate the value of their investments, and the increasing accountability that comes from better data and analytics capability.
Rather than using more traditional budgeting methods in which previous performance, sales, revenues or costs are used as a base to extrapolate future budgets, ZBB starts from scratch with a zero base and no assumptions, and effectively involves re-evaluating and therefore re-justifying every line on a budget. Programmes or activity which have been justified then form the basis for the budget, rather than an incremental increase from last year’s numbers, and it assumes no expenses to be pre-committed or balances to be carried over.
ZBB is seemingly a response to pressure for growth and efficiency, and the need for organisations to examine every financial investment with scrutiny, but it carries with it some notable advantages and disadvantages.
On the plus side, ZBB might be regarded as a more accurate and efficient way to allocate resources, particularly in the context of rapidly shifting environments. Using last year’s budget as a base can often lead to hidden assumptions and inaccuracies, and a failure to properly take account of changed circumstances. Since ZBB effectively questions the need for everything, it forces marketers to re-evaluate all expenditure and assess the value of every piece of activity, ensuring that surplus, low value or unnecessary spend is identified and cut or re-allocated. It might also lead to the discovery of more efficient ways to achieve goals, prevent unnecessary budget inflation and it involves staff in the budget process.
One of the main disadvantages of ZBB however, is often cited as the amount of time and resource that can be dragged into the process. Since it ensures that every budget line is considered, ZBB can be a highly time and resource intensive process, and potentially lead to staff feeling as though they need to repeatedly justify every element of expenditure. This can be somewhat frustrating if not done in the right way.
This feels like a significant shift, and the fact that ZZB is a growing trend in many organisations and marketing teams means that the impact is also potentially widespread. It could mean that suppliers find it harder to secure longer-term relationships when the value that they bring is questioned so regularly. It may also mean that it's more difficult for marketers to protect long-term investments and in some circumstances, it could potentially lead to projects or innovations being killed off too early because they have yet to demonstrate sufficient value. But then the counterpoint to this is that when things are moving so quickly questioning everything that you do is not necessarily a bad thing.
Either way, I'm surprised that there's not more debate about this potentially significant shift.
N.B. I'll be talking about ZBB in my latest Digital Shift trends webinars for Econsultancy, scheduled for Thursday 19th at 9am and 4pm UK time.
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