Use Zero-Based Budgeting to Rightsize Your Function’s Budget

ZBB is an effective way to rightsize budgets and align resources toward reprioritized business outcomes.

Zero-Based Budgeting (ZBB): A Guide for Business Leaders (gartner.com)

By Sid Sahoo | August 20, 2024

Zero-based budgeting can help align an organization’s cost with its strategy

Function leaders must juggle budget priorities every year, whether they are dealing with cuts or making room to invest in innovations like generative AI. Zero-based budgeting (ZBB) is an effective way to tackle this challenge of what to keep and lose in your current budget.

Traditional budgeting typically assumes a year-on-year continuation of activity and cost, while ZBB starts with a blank slate. ZBB forces stakeholders to review all expenses and ensure resources and budget allocations align with strategic priorities.

ZBB: Implement, operationalize and avoid common pitfalls

As you enter next year’s budgeting cycle and build your function’s next strategic plan, consider shifting to zero-based budgeting.

A 5-step process to implement zero-based budgeting

To successfully operationalize ZBB in the budget cycle and on an ongoing basis:

1. Ensure financial transparency. There must be granular visibility into whether costs are variable, fixed, discretionary or nondiscretionary, and the impact on costs if spend changes. 
2. Identify strategic priorities and KPIs. Cascade strategic priorities against which to evaluate and align costs. Identify KPIs to measure the success of investment.
3. Align, evaluate and optimize. Conduct the process of zero-based budgeting as a rightsizing exercise. Plan to repeat it every two to three years.
4. Control and monitor the budget. Perform monthly or quarterly reviews to identify budget variances aligned to business priorities and actions to address variances.
5. Embrace value-based spending. Operationalize the concepts of ZBB through an ongoing process of active assessment of all spend, regardless of whether or not it has been previously agreed to in the budgeting process.

Use ZBB for value maximization, not cost-cutting

Zero-based budgeting is often wrongly deemed a cost-cutting tool, but the idea is to rightsize budget and align functional spending priorities with desired business outcomes. ZBB can ultimately lead to overall cost reduction, but this should only happen if:

• There are no value-adding priorities to which spending could shift
• The enterprise is in a position where cash must be returned to the bottom line for imminent survival

Avoid common mistakes when implementing zero-based budgeting

• Positioning ZBB solely as a cost-cutting tool. To better engage stakeholders, focus on the benefit ZBB could bring to the organization by realigning spend to business outcomes, particularly as they fluctuate during and after changes in the business environment.
• Failing to assess the need for activities. When both senior leadership and budget holders have a strong understanding of the organization’s priorities, they can screen ongoing and planned activities for alignment with the priorities and identify opportunities to eliminate or reduce investment in less material activities.
• Adopting ZBB as the default budgeting approach enterprisewide. The process can be unnecessarily cumbersome for functions or areas of the business expected to provide precise and detailed information about their costs. Instead, focus first on areas of the business that would most benefit from using the ZBB approach following changes in business priorities.

Key roles and responsibilities in ZBB implementation

Zero-based budgeting is a collaborative process that requires clarity around ownership and governance for discrete parts of the process.

• Implementation team (IT-aligned finance team and corporate finance). Design the ZBB process and train everyone involved, assist business unit and functional managers in estimating costs and building decision packages, and facilitate cost-saving discussions.
• CIO, CFO and budget committee. Review and approve the final budget.
• Business unit and functional leaders. Prioritize critical activities, approve activity cost estimates and participate in cost-saving discussions.
• Business unit and functional team. Identify existing and planned activities, contribute to activity cost estimates and build decision packages for each activity.
• HR team. Support change management efforts, and provide reliable data on headcount allocations and salaries.

Zero-based budgeting FAQs

What are the advantages of zero-based budgeting?

Although implementing ZBB requires a significant effort and change to the traditional budgeting process, organizations facing cost pressures report the savings are worth the time investment. Applying zero-based budgeting principles can give functional leaders a strong lever to defend budgeting priorities and allocation in terms of the value they deliver to the enterprise.

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Do we need to repeat ZBB every year?

There is no need to zero-base budgets every year. Once adopted, ZBB can be used every two to three years to recalibrate department budgets. This helps to ensure they remain rightsized and focused on business outcomes, without expending additional effort every year to prove every dollar is adding value.

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How can we sustain zero-based budgeting beyond the budgeting cycle?

To encourage adoption of ZBB, executives should actively demonstrate and reinforce behaviors at its core, such as encouraging honest trade-off discussions evaluated in terms of business outcome impacts and making tough resource sacrifices. When executive leaders target procedural changes as part of ZBB implementation, they risk their functions viewing it only as a new method to budget, rather than as a principle for making better spending decisions.

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How should we evaluate whether items should be included in a ZBB?

Start by testing for strategic alignment. Does the activity, its scope and proposed cost for the budget align with and enable a strategic objective? Also test for efficiency. Is the activity and cost included in the budget sourced in the most cost-efficient way? Have you achieved the best price?