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‘Zero-Based Budgeting’ Returns to the Corporate Toolbox

Pulled down off the shelf where other financial philosophies such as “trickle-down economics” still lie, “zero-based budgeting” has been making a fierce comeback.

There’s little hope that the 35-year-old system of financial discipline will ever be used in the spendthrift federal government, but more and more CEOs—especially in the food industry—are proving that it can be a useful tool for checking expenses and rationalizing the business at a time when companies are under unprecedented financial pressures.

So, for instance, Mondelez International joined its former corporate sibling, Kraft Foods, in applying “ZBB” to “reset spending, identify specific cost reductions and capture sustainable savings,” as the global snacks giant put it in Mondelez’s most recent earnings report.

“Eighteen months into our ZBB efforts,” said Brian Gladden, executive vice president and CFO, “we’re delivering benefits faster than expected in all indirect cost packages.”

ZBB was what the Wall Street Journal called “a key ingredient” of 3G Capital Partners’ $49-billion deal to acquire Kraft earlier this year, in which it combined the parent of Velveeta, Jell-O and other popular CPG brands with Heinz.

“Eighteen months into our ZBB efforts, we’re delivering benefits faster than expected in all indirect cost packages.”

AB InBev, Pilgrim’s Pride and mid-market company B&G Foods, which recently acquired the iconic Green Giant vegetable brand from General Mills, are among the other CPG giants that have been applying ZBB, the Journal said.

And major players in some other verticals, including pharmaceuticals, are beginning to do so as well, such as Boston Scientific, Alcoa and Jarden. McKinsey in August counted 90 companies that mentioned zero-based budgeting in quarterly earnings calls just so far this year compared with 62 in 2014 and 14 in 2013.

“Zero-based budgeting” is a term that was introduced to the public in a 1970 article by Peter A. Pyhrr in the Harvard Business Review, and soon gained a following. It requires managers to go “back to zero,” as it were, and plan each year’s budget as if there were no money for their department or activity in the previous year, rather than using the typical method of simply adjusting up or down the prior year’s spending. “That forces them to justify the costs and benefits of each dollar every 12 months,” as the Journal put it.

President Jimmy Carter promised in the mid-Seventies to apply ZBB to a federal budget that was becoming bloated even then, although today’s presidential candidates couldn’t even begin to imagine how to apply the practice now.

And, as McKinsey stated, over the last few decades, ZBB “became dogged by misperceptions and faded into obscurity.” Today, it is enjoying a renaissance, as more companies dust it off to examine its advantages, and as the modern slow-growth economy—combined with the effectiveness of saber-wielding activist investors—forces them to consider more ways to reshape operations and budgets.

But the consulting firm also described a major difference in today’s versions of ZBB that have helped revive it. “ZBB of the 1970s was fundamentally about ascribing each company activity to a decision ‘package,’ evaluating and ranking these packages for their costs and benefits, and allocating resources accordingly,” McKinsey explained. “Today’s ZBB is much more than that— it’s a repeatable process to rigorously review every dollar in the annual budget, manage monthly financial performance, and build a culture of cost management.”

So ZBB is back. Whether its return appearance lasts longer than its first one largely will depend on how effectively companies find it is working for them. And the jury remains out on that.

Related articles:
6 Ways to Shake Up Your Budgeting Process
Fortune 100 CEOs With the Biggest Security Budgets
CFOs Are Taking a More Strategic Role in Mid-Market Companies



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