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Zero or Hero?
Introduction
For many organizations, the thought of rebuilding the ZBB is a budgeting process that allocates funding based
company budget from the ground up can be nightmare- on program efficiency and necessity rather than budget
inducing. Wiping the financial slate clean and starting history.1 As opposed to traditional budgeting, no item
from scratch would be a last resort in a worst-case is automatically included in the next budget.2 In ZBB,
scenario, never an option to be considered under normal budgeters review every program and expenditure at the
circumstances. Yet starting around 2008, an increasing beginning of each budget cycle and must justify each
number of organizations chose to do exactly that. Faced line item in order to receive funding. Budgeters can apply
with an economic recession, both public and private ZBB to any type of cost: capital expenditures; operating
corporations began to turn towards an extreme method of expenses; sales, general, and administrative costs;
budgeting known as “Zero-Based Budgeting,” or ZBB. marketing costs; variable distribution; or cost of goods
sold.3 When successful, ZBB produces radical savings and
liberates organizations from entrenched departments
and methodologies.4 When unsuccessful, the costs to an
organization can be considerable.
Fig. 1: Explaining Zero-Based Budgeting (ZBB)5
Spending increases or cuts
Budgets are not connected are not simply spread evenly
to prior year spending across budgets
• Prevents “embedding” of • Eliminates common “sandbag-
existing spend in the cost base ging” practices in budgeting
process
• Allows spending levels to be
set based on necessary • Allows for more strategic
activities of a function, rather allocation of planned spend
than historical trends
• Requires more work to analyze
• Requires more work to and prioritize activities and
understand activities and Zero-Based Budgeting expenditures
cost structure (ZBB)
A budgeting process that
allocates funding based on
program efficiency and necessity
Budgets are tied to Funding is targeted more to
specific activities and rather than budget history activities that align with
levels of service the strategy
• Better aligns spending • Allows for better alignment
targets with required of expenditure with overall
activities of a function strategy and departmental
missions
• Replaces “do more with less”
with “do the right things with • Can reduce incidence of
the right amount” “we’ve always done that”
• Requires fairly detailed • Prioritizing activities across
knowledge of departmental various functions can be
activities and willingness to do challenging
less or discontinue activities
Though the private sector uses ZBB,6 ZBB first rose to Explaining Rising Popularity
prominence in government during the 1970s financial crisis. ZBB has recently experienced a resurgence of interest in
Faced with mounting public pressure, U.S. President Jimmy both the public and private sectors. In the public sector,
Carter promised to balance the federal budget and reform this stems largely from contemporary fiscal constraints
the federal budgeting system using ZBB, which he had used precipitated by the 2008 recession. Facing budget cuts and
while governor of Georgia. Though initially well received, increased public scrutiny, government agencies have been
ZBB proved not only complicated and time consuming, using alternative budgeting methods such as ZBB instead
but also ineffectual,7 as it was Congress and the executive of more traditional budgeting methods such as line-item
branch that were ultimately responsible for deciding and incremental budgeting.11 A survey by the Government
whether to keep or eliminate a program.8 Additionally, the Finance Officer Association (GFOA) shows that over 20%
president’s budget office used a variant of ZBB as agencies of respondents are using ZBB or ZBB components, which
were asked to rank their programs within funding limits. represents a 50% increase compared to the period just
before the 2008 recession.12
This forced the agencies to assign priorities and identify
possible reductions. However, this meant that rather than Though cost reduction is a historically common tactic for
starting from a true zero base as ZBB would suggest, the private corporations seeking to free capital for investment
agencies would start from a “priority base” (e.g., 80-85% of in growth opportunities, restrictive budgeting practices
the current year).9 President Reagan abandoned the system have also witnessed an uptick in the private sector. For the
after his election in 1980.10 Since then, ZBB’s use in both 85% of CFOs who report above average levels of volatility
the public and private sectors has been limited due to its and uncertainty since the 2008 recession,13 restrictive
high level of complexity and large requisite investment that budgeting, including ZBB and its components, represents
can hinder its execution. an opportunity to mitigate risks by using aggressive cost
reduction to support growth14 while reassessing both short-
and long-term strategies.15
Advantages
• Supports cost reduction by encouraging active resource allocation • Supports cost reduction by encouraging active resource
over automatic budget increases allocation over automatic budget increases
• Increases organizational efficiency by forcing government agencies • Improves operational efficiency by challenging
to work together in order to actively prioritize programs assumptions at every level, especially for organizations
that are overly complex (for example, due to a merger
• Improves alignment of resource allocations with strategic goals by
or acquisition)
forcing cost centers to identify their mission and priorities
• S upports implementation of aggressive saving strategies
• Improves public perception through perceived increases in trans-
by identifying priorities at the department or project level
parency and accountability, both internally within their organiza-
tion and externally with the public
Disadvantages
• The ZBB process is costly, complex, and time consuming • T he ZBB process is costly, complex, and time consuming,
• Implementing ZBB at all can be a major challenge for public-sector • Implementing ZBB can be a risk for corporations
organizations with limited funding, and can constitute a major risk when the potential cost is high and potential savings
when potential cost is high and potential savings are uncertain are uncertain
• Government agencies may face extreme constraints relating to • Adopting ZBB can have unintended consequences on
their ability to complete ZBB within a budget cycle and the avail- company culture and brand in the marketplace
ability of personnel to drive the process internally
• Prioritization process may be problematic for departments with
intangible outputs
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