May 05, 2016 | Procurement Strategy
Peter Pyhrr proposed a new technique called zero-based budgeting (ZBB) in 1970 to help businesses manage their costs better. It made him very popular in the 1970s, landing him interviews with famous magazines and a lot of consulting work. However, over the last fifty years, the concept became obscure and outdated as companies went back to traditional budgeting techniques. A recent $49 billion takeover of Kraft Foods Group Inc. by Brazilian private equity 3G Capital Partners LP has brought ZBB back into limelight. Although it affects mostly the business stakeholders and budget owners of an organization, every procurement professional needs to know a few things about this process since budgeting can affect existing as well as future contracts.
ZBB is a budgeting process that allocates funding based on strategy goals, maximum ROI and functional efficiency, rather than historical budget and spending trends. As opposed to traditional budgeting, no item is automatically included in the next year’s budget. It is also costly, complex and time-consuming, as budget is rebuilt from scratch annually, whereas traditional budgeting requires justification only for incremental allocation. Some of the major highlights of ZBB are that it:
Looking at the cost and benefits of this very interesting budgeting technique is definitely worth a shot for every procurement organization to understand its feasibility with its business stakeholders. Some of the ways procurement can help business with ZBB are:
This an edited version of a GEP article that was originally published on Spend Matters.