Rapidly changing business models demand increasingly agile responses, as resources shift to support strategic objectives. The true value of zero based cost management lies in driving trade-offs between risk and value, thereby facilitating this need to constantly direct resource to the point of greatest strategic worth.
‘Transparency plays an important role in zero based cost optimization. Using a sound and trusted methodology we’ve successfully freed up 33 % of time for a client who is now able to focus on strategic tasks.’
Xavier Gabriëls, Head Financial Management
The volume of articles published in 2017-18 alone stands as evidence of the resurgence of zero basing. Commentators point to the various forces at work which have propelled it back into the collective consciousness of business leaders:
However, references to the approach as being a form of ‘dark art’ or an unknown ‘secret sauce’ in the process of cost reduction only serve to mystify, as do the limitless efforts to re-brand and conceptualize what is in fact a straightforward technical process. There is no doubting its potential value. Done well, zero basing can help to drive the most granular level of cost transparency, introduce new levels of cost conscious behavior and aggressively reallocate both funds and capacity towards those areas where they can deliver the greatest value. Clear and proven techniques used regularly in both the private and public sector help to demonstrate its effectiveness in cost optimization, particularly where a clear understanding of the activities, unit costs and productivity levers are made transparent and constantly challenged. However, it fell out of favor following its introduction over 40 years ago, with some executives at the time increasingly seeing it as unwieldy, labor intensive, highly disruptive and ultimately not delivering to the bottom line. A potentially powerful process was falling foul, it seemed, of basic failings in application.
KPMG professionals see some early and disconcerting signs of what we regard as similar mistakes being repeated which, if not countered, could likely result in a comparable fall from grace. Specifically five core shortcomings are at risk of being repeated across multiple organizations:
A new approach is required, one that builds on the principles of how private equity organizations create value. They apply a relentless focus on engaging with leadership to own and drive results, testing historical attitudes to risk and prioritizing resources to activities that create the most value. Put simply, getting leadership to re-think their organization through the eyes of an external investor.
Hardwired into this approach are a set of core principles which can help drive a compelling and differentiated approach:
These same principles we contend must also be placed at the heart of zero based cost optimization if the process is to succeed this time around. Doing this well helps to drive a fundamentally different conversation and perspective on how the work gets done in an organization. Focusing on the following, can create the conditions required for zero based success:
This long-term perspective is the most difficult to crack, yet the most important. The pace at which long-established business models are now changing demands far greater agility, not only in predicting these shifts, but in rapidly reallocating resources in response. Furthermore, the frequency of these changes creates a state of more constant disruption as executives seek to realign, and realign again, the pillars of their operating model with their forever changing customer needs, market dynamics and unique proposition selling points.
This is where the future positioning of zero basing becomes so crucial. Gone are the times when an annual cycle of budgeting using zero basing was adequate to reboot the internal cost management machine. The requirement for new levels of commercial and organizational agility put an ongoing, long-term, continuous process of challenging resource allocation at the heart of true competitive advantage.
So, when that old friend zero basing does make a house visit, it’s vitally important in the interests of better enabling organizational agility, that business leaders hear the bell, open the door and acknowledge the core pre-conditions set out here. By doing so, in KPMG’s view, they have the potential to be greatly increasing the likelihood of successfully applying it in today’s business environment.