Fewer than one in five CFOs feel that their company is properly organized to optimize its cash flow, according to recent Accenture Strategy research. This insight comes as pressures on businesses mount. They must find ways to reduce costs, improve competitiveness, and accelerate investments in automation technologies. They also must be agile enough to respond quickly to changes in the external environment.
Organizations that want to thrive in today’s markets need to be using their funds in ways that optimally support their business strategy, and they need to be prioritizing investments in strategic initiatives. The fact that many still don’t feel prepared to do so illustrates that now, more than ever, companies need to rethink their approach to corporate budgeting, spend, and cost reduction.
Enter ZBx, or the zero-based mindset, a new, more comprehensive take on zero-based budgeting (ZBB). ZBB refers to the practice of building an annual budget from the ground up, rather than basing it on the prior year’s financials. Many associate ZBB with corporate shakeups that entail mass layoffs or restructuring. However, ZBx is not about seeing fragile companies through times of disruption and change.
With ZBx, zero-based financial planning activities are integrated into routine organizational processes. The company engages in an ongoing, proactive exercise aimed at optimizing costs and spending on a continuous basis. ZBx takes nothing for granted. Looking at costs and processes in this new light might convince a company to shift its maintenance focus from upgrading to upkeeping, or to implement new automated technology, such as chatbots in call centers.
ZBx involves interventions in four key areas, all of which focus on reducing baseline costs to free up resources for new investments:
Zero-based spend (ZBS) helps companies optimize selling, general, and administrative (SG&A) expenses by providing forensic visibility into all spend and underlying cost drivers. This then empowers executive leadership to determine where spend can be reduced or reallocated, or where savings can be reinvested to drive stronger growth and ROI.
As new digital technologies emerge, they will continue to drive down costs, creating even greater savings going forward. They will enable companies to look beyond methods like benchmarking and granular price-volume analysis to reimagine their cost base—not based on what it is today, but on what it should be. As a result, businesses may eliminate whole cost categories through the use of new technologies.
Zero-based organization (ZBO) redesigns the organizational structure from a clean sheet. It builds the business “from the ground up” based on the company’s growth strategy, resizing and re-skilling the organization to succeed in today’s highly competitive digital environment. This includes shifting talent away from work that no longer contributes to desired outcomes, and toward the distinctive capabilities required to achieve growth goals and win in the future.
Central to a ZBO structure is a flexible ecosystem—including bots, virtual and cognitive agents—that allows talent to be moved from value-preserving jobs to value-creating ones. Underlying ZBO is the understanding that the organization, talent, end-to-end capabilities, and routines that have been passed from one generation to the next aren’t necessarily the same ones required to win in the future.
Zero-based front office (ZBFO) optimizes marketing, sales, customer service, and pricing to deliver superior customer economics.
Traditional cost-cutting efforts in the front office are a zero-sum game because they often lead to a decline in customer experience and a net-negative impact on P&L. ZBFO offers a powerful alternative by providing visibility into the economics of each customer and prospect, including insights into which customers are creating value and which are destroying it. As a result, the company develops a clear sense of which front-office activities should be cut and which should be kept, leading to significant savings and new, tailored customer experiences that boost profitability.
In addition to upgrading traditional front-office functions, ZBFO also drives improvements to pricing strategies and approaches, which is usually a highly impactful profit improvement lever, but one that is often overlooked.
Zero-based supply chain (ZBSC) is a fundamentally new approach that enables companies to reduce cost of goods sold (COGS) and dramatically shift supply chain cost curves. ZBSC starts with an analysis of “should costs,” or what the company’s costs should be, rather than relying on incremental reductions based on current cost curves.
ZBSC highlights cost-reduction opportunities across three levers—price, performance, and value engineering—while optimizing product value and minimizing service complexity. This new visibility into the supply chain baseline is then used to build a forward-looking view into future supply chain capabilities and costs, with bold new cost targets that exceed industry-leading performance.
The ZBSC approach to cost optimization comes as digital technologies and sustainability-focused thinking are opening the door to entirely new ways of boosting supply chain performance. Visibility into costs can be coupled with these new approaches to create innovative, reimagined business models that involve transforming manufacturing and logistics cost categories, such as direct materials, packaging, utilities, maintenance, and logistics. We’ve seen companies use ZBSC to achieve dramatic reductions in COGS, ranging from 500 to 800 basis points.
Just like crash diets, most cost-optimization initiatives don’t last. But ZBx is designed to offer a solution that (like any good health-and-fitness regime) is sustainable, achievable, and effective over the long term.
Keeping an organization lean in today’s rapidly evolving business environment requires a zero-based mindset. And maintaining the mindset requires a commitment from the CEO and leadership team to regularly evaluate and justify costs across the business. It also requires reframing all cost initiatives in the context of what will drive the most value for customers, employees, and external stakeholders.
ZBx in Action
Most companies today are engaging in some type of profitability initiatives. In fact, 80 percent of the G-2000 are involved in enterprisewide cost optimization interventions. But in today’s competitive climate, companies that are working to reduce costs without linking their projects to a broader strategy for reinvesting in growth seem unlikely to succeed.
A zero-based mindset can be a game-changer in a number of industries. One example is in the chemicals industry. At one point, the annual facilities cost for a large chemicals company came in at around $400 million per year. Through ZBx the company decided to leverage emerging technologies to redesign its global facilities. It implemented digital workplace solutions like smart building technologies, real-time operations management, and space management. The results have been dramatic. Now this company’s annual facilities costs come in at almost 50 percent less, which has freed up significant resources for reinvestment in strategic growth initiatives.
Another example is a $25 billion-plus consumer goods company that produces beverages for customers globally. The company has more than 100 manufacturing locations, and it used a ZBx approach to sizably reduce its operating costs. Like other higher-performing consumer packaged goods companies, this business has substantial raw material, packaging material, and conversion costs; the total of these costs used to encompass approximately 44 percent of the company’s revenue. Recognizing that growing operating costs might eventually threaten its bottom line, the company took a ZBx-based look at its organizational and cost structure, setting its procurement, supply chain, and manufacturing strategy and budgets from a zero base. As a result, it employed digital solutions like machine learning, intelligent automation, and digital energy and safety management. Since doing so, the company has seen its COGS fall from 44 percent of revenue to under 38 percent.
As a final example, a professional services company that used ZBx to reconsider processes companywide was able to “liberate” between 30 percent and 35 percent of its workforce in about 18 months by eliminating repetitive manual tasks through robotic process automation (RPA). Freed workforce capacity was then redirected to jobs demanding abstract thinking and contextual reasoning. Meanwhile, the company obtained productivity gains in the middle and back office—in areas including finance, supply chain, IT, and procurement—using digital interventions such as foundational automation, RPA, and artificial intelligence (virtual agents and natural language processing).
Zeroing in on Agility and Growth
So, how can companies get ZBx to stick? A full 60 percent of G-1000 organizations have announced major cost takeout programs, but most don’t last. The ZBx attitude needs to impact corporate activities from the CFO’s office all the way through to marketing, IT, and other core business functions. And every employee should be encouraged to regularly take part in this strategic re-evaluation and decision-making.
The end result: The organization becomes more agile, with employees buying into every aspect of their work. Instead of feeling like one small cog in the wheel of a big corporate machine, employees gain empowerment and understand that they have a key role to play, not just in the performance of their division, but also in the growth and direction of the company as a whole. In addition, when companies leverage emerging technologies to optimize productivity and minimize costs, they free up resources that can be funneled into growth initiatives—which can lead to further development for employees.
To ensure that their zero-based initiatives are strategic, comprehensive, and directly aligned to future growth goals, companies need to take these four steps:
Make the commitment at the top. Driving a ZBx mentality means securing commitment from the CEO and the leadership team to continuously zero-base and to communicate the benefits of long-term change. Senior executives are responsible for driving and operationalizing ZBx daily, which ultimately helps keep employees engaged, excited, and motivated to make the move to ZBx.
Focus on the four macro areas (ZBS, ZBO, ZBFO, and ZBSC) to get the needed cash to reinvest for growth. Companies that want to boost their competitiveness need to adopt a more comprehensive, holistic assessment of the current state of all their business costs. They should zero-base and examine their “should costs” for everything from plant maintenance to customer marketing and sales. That focus requires forensic visibility into the entire business. It takes resetting the budget from a zero base and changing the governance and the culture.
Redirect funds toward strategic technology investments. Beyond holding the key to a company’s competitiveness and survival, strategic technology investments can drive vast efficiencies that lead to significant cost savings in the long run. Digital workplace solutions, such as real-time operations management and sensors, can provide unprecedented visibility across a business, enabling companies to more quickly adjust to customer demands, seize on new growth opportunities, and identify risk factors well before they have a significant, and potentially costly, impact. Meanwhile, new workplace solutions like artificial intelligence and robotic process automation greatly enhance workforce productivity while freeing up time for the company’s workforce to be laser-focused on growth.
Hardwire ZBx into your company culture to create a sustained commitment to a “should cost” mentality. How? Create a healthy tension within the business. By that we mean providing a dual structure for category ownership in each business line, and across the company as a whole. Make the functional lead and a separate “category owner” jointly responsible for each expense. This inserts constructive tension into the cost management process, drives more balanced spend decisions, helps to sustain savings over time, and ensures there are checks and double-checks to keep the players honest. Achieving a zero-based culture also requires adopting a new operating model, one that reduces complexity, clarifies responsibility, and helps enable a sustainable corporate lifestyle.
Change isn’t slowing down. Companies that want to boost their competitiveness need to drive out costs and reinvest those funds in growth, as well as create agile operations that enable them to achieve business goals in a time of significant transformation.
For companies looking to gain the agility they need to thrive in the new normal, where chaos is typical and the ability to pivot to new market demands is a prerequisite, a zero-based mindset is a must-have. This isn’t just zero-based budgeting; it’s a fundamental change in the way a company does business. It’s about trimming the excess and putting resources where they really matter, so that the company becomes a lean, powerful machine that can adapt to whatever the future throws at it next.
Kris Timmermans is a senior managing director in Accenture’s Strategy, Supply Chain, and Operations Strategy group. In this role, he helps global organizations develop dynamic supply chain and service operations capabilities. Timmermans is a frequent author and speaker on the topic of procurement. He is based in Brussels, Belgium.