In this edition of KPMG's Energy Institutes Plugged In asked Chris Young, Graeme Young and Fergus Woodward to discuss what “zero basing” is and how it works, why power and utility companies need to be taking a hard look at it, and how it's turned around the fortunes of many organizations.
Why is zero basing attracting so much attention from the industry now?
Traditional power and utility (P&U) companies have been under growing pressure these past two decades to make significant changes in the way they operate. This pressure has come on multiple fronts; from regulators, from the public, and as result of increased competition. Regulators have been pressing P&U organizations to lower costs to customers while, at the same, requiring them to meet increasingly stringent performance and customer satisfaction standards. This also includes pushing the industry to adopt more environmentally friendly, renewable energy alternatives. And thanks to deregulation efforts by the government to break up monopolies and encourage competition to reduce customer costs, traditional P&U players are also facing challenges from new, lower-cost competitors. These companies are often digitally enabled, technologically advanced, and more agile.
Finally, P&U organizations are finding that their formerly “captive” customer base has more freedom to choose a provider, is less loyal, more knowledgeable and ready and willing to switch companies. This is particularly the situation confronting P&U organizations that held regional monopolies.
Some organizations have responded to this multi-headed attack primarily through classic cost cutting - laying off workers, cutting down on the use of contractors or freelancers, squeezing suppliers, and so on. But the industry is coming to understand that it needs to take more radical, fundamental measures in order to change the dynamic (while still providing a solid return to their shareholders). When done correctly, zero basing allows P&U organizations to reduce complexity, gain agility, and better target their resources and effort to overcome the regulatory, customer and competitive obstacles they're facing and position themselves for success in the future.
Zero basing is different than zero based budgeting
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.
This leads to better informed concrete choices on how to reallocate resources so that spending levels are “right” - not just lower - and where they should be targeted to have the greatest strategic impact. The prize for getting zero basing right can be significant: We have helped many P&U organizations achieve savings of 10-30 percent in spending.
How do you implement a successful zero basing program?
There are five key components to consider if you want your zero basing program to be successful.
- Focus on big value areas
Focus on the areas with the potential to generate significant returns or results to justify the considerable effort required. This means understanding your current costs and what's driving them, where gaps exist in performance, and how to improve it.
- Prioritize human factors over technical process
It's critical to engage the “hearts and minds” of your personnel at all levels to operate a successful zero basing program. This includes senior management as well as the workforce. In KPMG firms experience, a key reason for zero basing not working out as planned is that the business failed to adequately address the human factor in its design and deployment.
- Balancing what's needed with what's being done
Once target areas have been identified for zero basing, all associated activities need to be scrutinized to determine whether they're necessary and if alternate options exist.
- Tackle attitudes to risk head on
KPMG professionals have found that the most effective zero basing programs ensure that the “right” people - the ones who know the business best - are involved in evaluating the risks of any proposed changes and developing options and alternatives. Only major decisions with high potential risks or high profiles are escalated to the board and decided at the most senior levels; lower level risks are addressed by those lower down in the organization.
- Drive long term value for zero basing
Zero basing should not be viewed as a one-time shot in the arm. Because of the rapid pace of change in the industry, organizations should continually look for “hot spots” that need to be scrutinized and reevaluated for current resource allocation requirements.