In this edition of KPMG Energy Institute’s Drilling Down we asked Chris Young and Graeme Young to discuss the “zero basing” concept, why energy companies need to be taking a hard look at it, and how it’s turned around the fortunes of many organizations.
Oil and gas companies have been under tremendous pressure the past few years on several fronts. They’ve experienced big swings in commodity prices, questions have been raised about their fundamental business practices, and competition has come from new – and sometimes unexpected – entrants into the market.
Many companies have responded primarily by cutting costs – laying off employees, getting rid of contractors or freelancers, squeezing suppliers, and so on. But the industry is beginning to understand that it needs to do more to change the dynamic.
Zero basing is exactly what oil and gas companies need to meet these challenges. Instead of repeating top-down cost reductions, it focuses on simplifying and rationalizing activities. Rather than trying to do the same work with fewer resources, zero basing gets to the heart of what these companies need to do to prosper in today’s challenging environment: reduce complexity, and target resources and efforts on the activities that genuinely create value.
When done correctly, zero basing allows oil and gas companies to do the seemingly impossible task of reducing costs without overwhelming teams that have already been stretched by previous cost reductions.
While zero basing and traditional zero based budgeting (ZBB) have common roots, zero basing has evolved a long way from ZBB.
The traditional ZBB process is typically led by finance, which scrutinizes every expenditure to build a bottom up annual budget. Zero basing primarily is driven by business leaders who understand the trade-offs between costs, risk and value of the services and products they provide.
They focus on business activities and drivers (e.g. marketing), creating alternatives, and then translating them into innovative strategies with an eye to cost, budgets and performance. This, in turn, leads to better informed, concrete choices on how to reallocate resources so that spending levels are “right”—not just lower – and have the greatest strategic impact.
The prize for getting zero basing right can be significant: We have helped many organizations achieve savings of 30 percent or more compared to their prior spend, or significantly improve returns with the same level of investment.
There are five key components to consider if you want your zero basing program to be successful.
Yes. Emerging technology and powerful data and analytics (D&A) tools enable organizations to analyze enormous sets of data and do zero basing far more efficiently and quickly than ever before.
In addition, sophisticated visualization tools create vivid, easily understood graphics that let you view multiple outcomes simply by changing certain variables. This lends itself to real-time decision-making based on the most up-to-date data.
In this new ultra-competitive energy industry environment, companies may need to be simpler, leaner, and more flexible and agile. Zero basing offers a path for doing just that. It’s not just about cutting costs; it’s about making clear, informed, strategic choices on where to allocate resources and what business strategies to implement.
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