Budget planning: Finding the value of a ‘zero-based’ approach

As this article goes to print, 40 million people will have watched a computer program called AlphaGo defeat the world’s Go human champion, Lee Sedol. Go is a deceptively simple and profound game invented in China and played all over East Asia. 

What makes this triumph of artificial intelligence over humans so interesting to businesses is the commercial possibilities of the its technology to teach computers to recognise faces, translate between languages and show relevant ads to internet users. 

If John Wanamaker were alive today, he would be banging his fist demanding the other 50 per cent.

But until Google writes a software program that replaces humans in the budgeting process, it is worth examining the merits and pitfalls of zero-based budgeting (ZBB), a trending headline since Unilever announced its move towards the strategy in late January this year. 

While some call it a “belt-tightening move” in the face of uncertain economic conditions, others praise the FMCG giant for adopting a strategic approach to creating marketing budgets. What exactly is ZBB? Is it good or bad for business? The essence of ZBB is not the commonly misunderstood ‘zero’, but the whole idea of value. 

Zero to hero? 

ZBB often gets a bad rap as a cost-cutting trick that companies employ when they are in economic trouble. 

Many define ZBB as wiping the budget slate clean every year and starting from zero, rather than extrapolating on the past years’ trends and next year’s revenue projections. It requires each function within an organisation to be analysed for needs and costs, and expenses to be justified for each new period. 

While it can be more time-consuming than traditional budgeting, ZBB is all about funding based on efficiency and comes with the requirement for greater effort in determining ROI on every aspect of spending. So it allows for more visibility on the value of each function.

In addition to Unilever, ZBB has been adopted in the past several years by many of the world’s largest marketers, most famously by Kraft Heinz, Coca-Cola, Nestlé, Mondelez and Pepsi. 

Some companies employ ZBB less as a strategy to identify what adds the most value to the business and more as a cost-cutting method. Consumer goods giants, in particular, have struggled recently in the wake of the economic downturn, but also as consumer taste shifts and people move towards healthy lifestyle choices. 

Many have found the implementation of ZBB to be a success. Mondelez has claimed to have saved US$350 million in SG&A in 2015 and is projected to have a three-year saving of US$1.1 billion with increased margins. 

There are definite pitfalls to adopting ZBB as a blind mantra or a panacea for any marketing or budgeting ills. For example, making sure that smaller markets and brands receive adequate support and don’t miss out on the investment they need. 

However, when used appropriately, ZBB can be an invaluable tool for focusing on core goals to drive growth rather than just chipping away at costs and overhead. It allows the marketing team to invest money strategically and leads to proactive marketing. Instead of doing what you’ve always done or adding/subtracting from the previous year’s budget, ZBB forces marketing teams to examine what’s increasing ROI.

Client relationships  

Unsurprisingly, agency heads that weighed in on Unilever’s shift to ZBB don’t seem too enthusiastic. Some speculate that ZBB might threaten client-agency relationships, as pitches can sometimes be called to drive costs down. However, instead of viewing this shift as a business threat, agencies and marketers can look to another model — value-based remuneration — to better align on driving business results. 

The commonly used labour-based remuneration model for most client-agency relationships presents problems for both parties. Like a taxi fare, the client has to pay whether or not the agency adds any value, and the agency is paid a fixed amount regardless if the value created is tiny or significant. 

If a marketing firm shifts to a ZBB approach, looking to invest only in what creates value to the business, it would make sense thta the firm will prefer  to compensate its agencies based on the value added, rather than the number of hours spent on a project.  

This will however be tough to achieve if marketers keep pumping millions into their legacy network agencies and traditional ATL campaigns. 

Marketers need to re-look at their agency partners to ask themselves: “For the launches where my returns are smaller, what kind of activities should I be investing in that are simpler and cheaper to deliver but still get me the results?” 

In an age where consumers are always on, speed and agility, across all divisions, will matter more than ever. 

Value-based approach

R3 has worked with leading FMCG companies, financial services and telecom companies on implementing value-based remuneration models and found that the approach can be a catalyst for marketers to improve three main areas: measurement, accountability and sustainability. 

If you don’t know which brands or campaigns are increasing ROI, it is impossible to create an accurate budget. It will also drive accountability, both internally and externally, with marketers being held accountable to business and agencies being pushed to deliver what matters. Finally, the more agile and responsive model focusing on measurement and accountability will empower teams to learn from failures much faster and replicate success quicker.

The end game for ZBB and value-based remuneration are the same -— spending marketing dollars effectively and efficiently. Marketers can mitigate cost redundancies, while freeing up that money to invest in market trends, which is crucial in the current landscape of constantly shifting digital ecosystems and agency relationship models. 

However, it is important to note that while ZBB can provide cost cuts and savings if implemented correctly, it cannot be used to solve larger brand issues. 

Shufen Goh is principal and co-founder of R3