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Zero-Based Budgeting Case Studies

Matias Bullrich's Profile

zero based budgeting exampleHi all. I am looking for good case studies or books about zero based budgeting. It has been profiled as one of the secrets of success of Jorge Paulo Lemann (Ambev beer, Burger King, now Heinz in partnership with W. Buffett) and all I find is a book from 1973 on amazon and some very superficial articles on the net. Would appreciate insights with regards to this practice as well as any case studies or professional references. thanks!


J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

Zero-based budgeting (“ZBB”) is an old budgeting technique that came into vogue in the mid-1970’s, especially after Governor Jimmy Carter promised to use it to reign in the federal budget during the 1976 presidential campaign. (He didn’t follow-through, obviously.)

ZBB is still used by private equity and turn-around managers (e.g., like Lemann and Buffet) who have a broad and powerful mandate for overhauling companies.

Given the inherent resistance to change, and the sensitive corporate political challenges of ZBB, most legacy company managers who are looking at cost reduction today tend to use more conservative techniques for cost-cutting, such as across-the-board cost savings or Lean. A wise few management teams use ZBB every three to seven years as part of their regular budget process to cut “dead wood” from their budget, so that they realize the benefits of ZBB without the stark shakeup that occurs when it is first implemented after a long period of baseline budgeting.

As you likely already know, ZBB is radically different from traditional baseline budgeting, where prior operational experience is used to increase or decrease budgets.

Broadly speaking, ZBB requires budgeters to define mission-critical functions; then, to re-imagine how to achieve them “from scratch”. It opens every aspect of the company’s operations to critical examination, from procurement, to financing, to employees, to facilities, to inventory, to R&D, to administration, to distribution, to name only a few. Everything is on the table; no function is immune from scrutiny.

Overall, ZBB is a time-consuming, very challenging, almost cathartic exercise. Headcounts can be drastically reduced; entire functions can be combined or outsourced (or eliminated) and long-standing business relationships can be severed for more efficient or less costly competitors.

ZBB is also inherently risky. The “don’t fix what’s not broken” crowd will fight it at every turn; those who feel threatened will try to sabotage the process, and any failure – a new supplier who fails to deliver; a critical function that fails; a major customer that is lost – will all be laid at the feet of the agent of ZBB change. (See, later, about the critical need for executive and board support.)

But ZBB can result in staggeringly successful performance improvement if it is done well. (In the 1980’s and early 1990’s there was a wave of “right-sizing”, “process improvements” and “outsourcing” that improved US corporate profitability enormously. At their core, though, these processes were merely warmed-over ZBB by another name.)

ZBB requires the early and continued buy-in of key executive stakeholders in the company and the full support of the company’s outside directors and/or owners.

Since ZBB can sometimes result in senior executives eliminating their own jobs, some companies adopt generous contingent severance arrangements of all their executives so that the entire executive team buys entirely into the process, even if one or more of them are “voted off the island” in the ZBB process.

It’s also critical that ZBB be done quickly, although it is best done function-by-function after the mission-critical functions have been determined.

For example, it may be easy to determine that the in-house payroll department can be outsourced completely since its not mission-critical to have its function under the direct control of the company. But in-house procurement may be mission critical and require close examination. That examination should be done quickly, within 30 days or so; then, the cost-cutters should move on to the next function. (I am personally agnostic as to whether the cost cutting should be done piecemeal after each function is evaluated, or whether all departmental surveys are concluded and then cost-cutting implemented in a sharp change of a few days or weeks. Both ways have advantages and disadvantages. But either choice must have the full support of senior management and even the board.)

ZBB is based entirely on functions and processes, not on departments or products. Executives who have been outside auditors, particularly from the Big Four (I'm ex-"Big 8") are especially useful in the process because they have experience examining processes and functions from a macro perspective. They can assess the functions and contribute their thoughts as to how the functions can be improved, consolidated, outsourced, or eliminated.

If you're a legacy manager, you may wish to consider other alternative, such as across-the-board budget reductions, Lean (which segregates and eliminates no-value added processes), and other money-saving budget techniques before committing to ZBB as each of them is an easier and less risky process.

Should you determiine to go ahead with ZBB, these books (mostly out of print, but available on Amazon resellers) may be helpful. They are listed below:

Zero-Base Budgeting Comes of Age, by Logan M Cheek (1977)

Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses, Peter A. Pyhrr (1973)

Most budget hornbooks will have some discussion of the process, though not as detailed as these two. The Pyhrr book is the better of the two, but after you read it, you may find yourself saying “these techniques are so obvious…” (But if they were that obvious, companies would have already been doing them.)

Last, if you're a legacy manager, ZBB should be incorporated into your budget process every three to seven years. Having endured the radical change and disruption that is ZBB, it is easier to prune your company company, going forward, than to have to cut off whole branches of deadwood again 10 or 15 years from now.

Feel free to contact me here or through our website if I can be of further assistance.

Good luck and best wishes.

J.G. Collins

Matias Bullrich
Title: President
Company: Mandrill Capital Management
(President, Mandrill Capital Management) |

Thank you very much for your articulate reply. In view of the fabulous results Lemann/Sicupira/Trelles have had, now replicated by 3G and validated by Warren Buffett, I just don't think a professional CFO can avoid taking a look. A procedural guide would be great to have. I will go ahead with the Pyhrr book. Thanks!

Jim Burtt
Title: Director Global Financial Systems & Proc..
Company: formerly at Guidewire Software, Inc.
(Director Global Financial Systems & Processes, formerly at Guidewire Software, Inc.) |

I have implemented ZBB in conjunction with project portfolio management in R&D and IT environments which lend themselves to projectization of headcount, OPEX, and CAPEX. Incremental spending must be justified by strong business cases. Recurring spending is ripe for review in terms of value engineering, cost reductions and possible outsourcing. Managing budget decisions by projects rather than departments enables management to see how much is being spent on particular efforts at an enterprise level and ensures that strategic priorities are properly funded by all participating functions.

I ran across the following article which may be of help:

Best regards,

Jim Burtt

Matias Bullrich
Title: President
Company: Mandrill Capital Management
(President, Mandrill Capital Management) |

Thank you!

Duncan Williamson
Title: consultant
Company: duncan williamson ltd
(consultant, duncan williamson ltd) |

Thanks for finding my page Jim!!


Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

In addition to the discipline and significant effort required to establish and implement a Zero-Based Budget, an organization must be able to quickly and effectively analyze their actual results vs. the established budget. Ideally, they should have the capability to forecast their' organization's Balance Sheet, driven by the ZBB data input.

I have personally seen at least one case of a failed ZBB initiative, as the organization was unable to properly track their actual results against the ZBB. This can be done and be successful, but it takes more than knowledge of the theory behind it.

Matias Bullrich
Title: President
Company: Mandrill Capital Management
(President, Mandrill Capital Management) |

appreciate your answer. I believe a practical procedural guide would be great to have, along with some case studies, because as you mention, the theory is not enough. Thank you!

Duncan Williamson
Title: consultant
Company: duncan williamson ltd
(consultant, duncan williamson ltd) |

You can find a lot of examples of zero base budgeting (nb, zero base not zero based ... my little annoyance ... the Cheek and Phyrr references confirm that) in the government sector too. By the way, President Carter did have some success with ZBB both in Georgia and in the Federal domain. A friend of mine told me that colleagues in his consultancy firm carry our ZBB in an SME setting and they report AVERAGE savings on discretionary expenditure of 80%: astonishing, isn't it!

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

We do zero based budgeting in that we do not really create a "jumping off" point and build the budget incrementally for there. The downside is it requires a pretty sufficient level of detail to get comfortable you have covered all the bases. The flip side is you end up with a very good basis for doing variance analysis. It is very resource intensive but if you are in a business that has a lot of movement in costs driven by external factors, I believe it is the way to go.

Kelly Dowe
Title: Director, Finance
Company: City of Houston
(Director, Finance, City of Houston) |

While this paper is government-focused, I think it does a very good job of trying to pin down exactly what people mean by zero based budgeting. Sometimes it means something quite different from person to person. It also sifts through the pluses and minuses of the different approaches.

Topic Expert
Phyllis Proffer
Title: Owner, Investor Relations Counselor
Company: The Heights Company, LLC
(Owner, Investor Relations Counselor, The Heights Company, LLC) |

I was responsible for three zero-based budgets at the beginning my career. I charged corporate departments for telephone, facility and other administrative services they used based on actual services and space utilized. All of our corporate expenses were charged back to the divisions according to the size of the operation. The assumption was larger divisions used more legal, finance and other corporate resources than the smaller ones. The profit performance of each division, including their portion of corporate expense, was compared with other divisions annually. Decisions about management changes, division growth, combination and divestiture were based upon the annual analysis.

As a side note, I changed the charge back system for telephones shortly after moving into the department. Because the budget was zero-based, a rather large sum of money which couldn't be accounted for each month surfaced. Further analysis indicated that the unknown expense had existed for years and grown proportionately. As it turns out, someone had hacked into our telephone system. A simple program change ended the abuse and the unknown expense stopped. As Mark mentioned, zero based budgets involve details and the people at the beginning of the stream need to be very meticulous about execution. However, there is value.

Stuart Brown
Title: CFO
Company: Red Robin
(CFO, Red Robin) |

One challenge that I have found in ZBB is getting buy-in from the organization. While people conceptually understand, the rejustification of what a department does and the benefits are not always financially quantifiable. If done as a "contingency" exercise (planning for upside and downside performance), I would think there are solid benefits to a ZBB exercise. I agree with the comments that this does not need to be an annual exercise.

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