More CEOs Are Using Zero-Based Budgeting, but Is it Right for Your Firm?

The system that requires managers to go “back to zero” and plan each year’s budget as if there weren’t one for the previous year keeps spreading within the troubled consumer-packaged-goods sector that has been largely responsible for its rebirth in the corporate realm, as well as expanding into other verticals such as health care.

One-fifth (21%) of CEOs in a recent survey of 138 companies by CEB Global use zero-based budgeting already. And Republican presidential candidate Carly Fiorina, former CEO of Hewlett-Packard, has been creating traction for the topic by suggesting the U.S. government adopt ZBB.

But CEOs who consider the attractions of zero-based budgeting—a 35-year-old discipline that was introduced to the public in a Harvard Business Review article by Peter A. Pyhrr—also must be wary of a number of things, including push-back they inevitably will receive from affected constituencies such as employees, and the danger of counting on the financial practice to achieve too much.

Kellogg recently became the latest high-profile American food company to adopt the method of justifying expenses anew each year amid a vast process of restructuring to attempt to buck the slow-growth mode that has overtaken the ready-to-eat cereal giant much as it has other traditional CPG giants. The company is trying to become less dependent on sales growth by cutting corporate spending, laying off employees and closing less-efficient factories—and zero-based budgeting has become its guide.

“It provides people the opportunity to challenge how we have done things and drive activity out that isn’t benefiting the consumer,” Kellogg CEO John Bryant explained last month.

Meanwhile, ConAgra Foods also switched to the accounting method over the summer under new CEO Sean Connolly, who told analysts, “Every single thing in our budgets has now been zero-based” as part of a “relentless” campaign to root out inefficiency in areas including corporate operations, the cost of ingredients and supplies, labor costs and trade spending.

And now other industries are taking a closer look at the tool. “Could healthcare organizations employ zero-based budgeting to ensure spending is going in the right direction and effectively control costs?” recently asked Beckers Hospital Review magazine.

“Hospitals and health systems must respond to numerous external challenges that affect their finances, such as public and private payers’ efforts to reduce costs, fluctuating inpatient volumes, the increased adoption of bundled payments and other transformative payment systems, as well as increased co-pays and deductions that incentivize a more conservative outlook among patients on healthcare utilization.”

But Deloitte, among other consultants, urge caution for CEOs and CFOs who may be considering adopting zero-based budgeting. The jarring effects of layoffs that may occur at Kellogg, ConAgra and other companies—and already have taken place at ZBB adopter Mondelez, for instance—are one reason.

Among the other disadvantages of the practice, the consulting firm recently pointed out, is the fact that it “may be cost-prohibitive for organizations with limited funding,” “risky when potential savings are uncertain,” “disruptive to the organization’s operations,” harmful to the company’s culture or brand, “typically requires specialized training or personnel to accomplish, and requires more resources in general.”

So while zero-based budgeting may be attractive to more CEOs who are looking for silver bullets to use in difficult times, like anything else, it is no panacea.