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 (Edited Image. Courtesy: Accenture)
Why Zero-based budgeting (ZBB) has got a new life in the corporate world? Why the Governments across the world largely remain disinterested in retrying ZBB? And why Governments don’t subject colossal tax expenditures/incentives to ZBB? Can re-conceived ZBB be perceived as sustainable growth mantra in the age of unforeseen disruptions?
A lot more such questions are bound to crop up if one delves deep into ZBB - an interest that gets ignited when top multinationals (MNCs) across the world share their ZBB goals & achievements. 
Several consultancy giants have given currency to this trend by pitching value-added ZBB strategies to their clients. A few entities such as Deloitte, however, see ZBB enthusiasm waning fast. 
According to Deloitte’s first Global Cost Survey Report released a few months back, “ZBB use is expected to decrease globally from 13% to 10%, a real decline of 23%”.
Earlier, in a 2016 document captioned ‘Zero-Based Budgeting: Zero or Hero?’Deloitte stated: “ZBB components and theory may be useful in specific sectors under specific circumstances.37 Although the economic environment has driven renewed interest in ZBB, more practical and less costly budgeting alternatives are available that can meet organizational needs”.
As optimists outnumber & outshine pessimists, one can’t afford to overlook impressive data and studies reeled off by the former group. This is the key to understanding why ZBB works well for some and turns out to be a headache for others.
Take the case of Verizon Communications Inc. In its annual report for 2017, Verizon says: “We have deployed a zero-based budgeting initiative to take $10 billion of cumulative cash outflows out of the business over the next four years. As part of this initiative, we will focus on both operating expenses and capital expenditures”. 
The company is applying ZBB in tandem with Lean Six Sigma process to improve its business efficiencies.
Announcing its robust Q1 2018 results, Verizon stated that this Business Excellence Initiative, announced last year, has started yielding results. It has already resulted in a saving $200 million. “The program is on track to deliver against Verizon’s goals over the four-year period,” it added.
Restaurant Brands International (RBI), a 3G Capital group company, is also reaping fruits of ZBB. It manages three quick service restaurant chains - Burger King (BK), Tim Hortons (TH) and Popeyes.
In its annual report for 2016, RBI says: "We have achieved significant cost efficiencies at TH and BK through a cost management system, which requires departments to budget by estimating and justifying costs and expenditures from a zero base," rather than focusing on the prior year’s base.
Consultancy major Roland Berger believes that application of ZBB in consumer goods (CG) industry offers potential saving of $ 108 billion if all consumer goods firms embraced ZBB. It has arrived at this estimate by assuming 17% saving in selling, general and administrative costs (SG&A).
In a study titled ‘Zero-based budgeting in consumer goods - How to extract maximum value –fast’, RB notes that 4 out of top 10 CG companies - Unilever, Coca-Cola, Anheuser-Busch InBev and Mondelez, apply ZBB.
71% of companies applying ZBB keep SG&A cost growth below revenue growth, while only 44% of companies without ZBB achieve such ratios,” it observes. “Our study also suggested that companies which do not apply ZBB leave a significant SG&A cost reduction potential of 17% untapped,” it adds.
A higher percentage has been recorded by Boston Consulting Group (BCG) in certain companies. In a paper titled ‘Zero-Based Budgeting for the Growth-Oriented CEO’ published last year, five BCG experts explain why “ZBB is not a one-size-fits-all system; each company needs to develop its own version and align it with the company’s particular circumstances and goals”.
They add: “We have helped companies achieve sustainable cost reductions of as much as 25% (sometimes even more) by going beyond reducing head count and slashing budgets. Instead, companies differentiate costs and focus on cuts that will have a positive impact on performance while causing little or no collateral damage. We use a company’s own strategic priorities to define the principles that will govern choices during and after a project. Companies can then develop a comprehensive overview of spending, an important aspect of which is creating data transparency”. 
BCG’s latest primer on ZBB says: “CPG (consumer packaged goods) companies have achieved a 7% to 15% savings on absolute cost base with zero-based budgeting”. 
Listing out advantages and disadvantages of ZBB, Primer adds: “There’s a smarter approach to zero-based budgeting”. It advocates a 9-steps approach to strike a balance between cost reductions and growth. 
Consultancy majors are thus offering tweaked, value-added versions of ZBB under names such as Accelerated Zero-Based Budgeting (AZBB), smart ZBB and ZBBplus to drive home the proposition that ZBB should not be used as a mere cost-cutting tool.
As righly put by ATKearney, “Done right, ZBB can permanently lower your company's cost base without losing focus on profitable growth”.
Unlike traditional budgeting methods such as making usual alterations to the last year’s budget outlays, ZBB expects budget planners to start with zero allocation. It expects answers within an organization as to rational for continuing/scaling up/aborting an activity or project. The allocation is arrived at after such rigorous analysis, which might lead to allocation of funds to ones that are already delivering well or promise to deliver in near future. 
In a paper captioned ‘Zero-Based Budgeting Cut Cost, Not Growth’, ATKearney defends ZBB as “elegantly logical: expenses must be justified for each new period based on demonstratable needs and costs. ZBB is a powerful alternative to the more common method of using the past year's budget as your starting point, then adjusting up or down”.
ZBB was conceived and applied by Mr. Peter A. Pyhrr at Texas Instruments in late sixties. His article on the subject in Harvard Business Review in Nov-Dec 1970 issue attracted many eyeballs. 
According to a 1977 Master’s thesis captioned ‘An analysis of a Zero-base Budgeting System Implemented at A U.S. Naval Activity’, Mr. Jimmy Carter, then newly elected Governor of Georgia, invited Mr. Pyhrr to join his staff and introduce ZBB in 1972-73.
It is interesting to note that Georgia still follows ZBB religiously. Its 2013 report on ZBB is enlightening on how it eliminates dubious expenditure in different spheres. It appears Georgia regularly puts in public domain its ZBB reports. The State’s  report for fiscal 2019 also contain a few proposals to eliminate expenditure that can’t be justified as yielding good, concrete results.
United States General Accounting Office (GAO) has a different take on ZBB’s origin. In a 1997 report captioned ‘Streamlining - Zero-base Budgeting Will Benefit Decision-making’, GAO pointed out that the origin of ZBB has been traced back to at least 1924 and probably goes back much further. As early as 1962, the Department of Agriculture used a variant of ZBB to formulate its fiscal year 1964 budget estimates
It stated: “However, branded as a failure, the process was abandoned until the late sixties when a modern version of ZBB was successfully used by private businesses”.
Mr. Carter brought ZBB into global limelight in the 1976 presidential poll campaign. 
Shorting after assuming charge at the White House, President Carter issued a memorandum on 14th February 1977 to the heads of executive departments and agencies mandating use of ZBB for all fiscal year 1979 agency budget requests. The memorandum mandated that a new ZBB budget process would replace—not simply accompany or link to—the existing executive branch budget formulation process for all budget proposals in the immediately upcoming budget cycle.
In subsequent years, successes were few, failures were many. ZBB largely fizzled out from Government departments and corporate world because it was used as a cost-cutting scissors. Bureaucrats found ZBB cumbersome and burdensome. ZBB actually conflicts with the interest of political executive. The elected representatives always want to dangle some new scheme, some new incentive before voters to remain relevant & to return to power at next elections. 
India is a classical example. No Finance Minister has ever presented an annual budget without unveiling new scheme or enhancing allocations in many domains without assessing the actual return on investment. 
The upshot of this is gradual increase in the number of largely federal Government funded centrally sponsored schemes (CSS). These have been pruned & regrouped a few times to minimize the scope for duplication of investment and mismanagement. 
Indian Government invokes ZBB only when it wants to rationalize CSS. It has otherwise failed twice in implementing ZBB across all organizations. It first introduced ZBB in 1986 and reintroduced it in 1999. 
In both the attempts, the execution flopped in first or second year in most ministries and their appendages in the 2nd or third year. Lack of expertise within ZBB was obviously one of the reasons for failure. 
This issue has been addressed by International Monetary Fund in its Country Report on Ukraine released during February 2016.
IMF has advised the authorities to take the help of professionals who specialize in ZBB. The report says: “Few organizations can successfully apply ZBB without the assistance of professionals who are expert in appropriate techniques”.
The risk of slump in popularity rating of ruling party deters the Government from weeding out schemes that have outlived their utility or from stopping freebies that unproductive and prone to misuse.
An instance in point is Central Government scheme for granting monthly pension to freedom fighters, the ones who supposedly helped India attain Independence from British Raj in 1947. How many of them are still alive? This question would have been posed had there been ZBB. 
To drive political mileage, the Government extended during March 2018 the monthly pension scheme for freedom fighters, their dependent spouses and their unmarried, unemployed daughters for three years. The extension has been done with retrospective beginning from 1 April 2017. The Government has allocated Rs.  2552.93 crore for extension period 2017-2020.
The situation with regard to crony capitalism is same as is the situation for vote bank politics in India. Cronies, who fund politicians to capture power, ensure that the Government does not subject tax benefits to ZBB.  No wonder then that Union Government’s tax expenditure continues to rise every year despite all noise over phasing out tax incentives. 
While incentives under the indirect taxes category have declined due to introduction of goods and service tax (GST), the subsidies given under direct tax category continue to rise every year. 
In March 2017, A Parliamentary Committee thus stated: “the time has come for a fresh appraisal and comprehensive cost-benefit and impact assessment analysis of existing exemptions and incentives case by case and if they are not found to be serving the purpose, such exemptions straightaway need to be phased out as soon as possible”.
India’s massive and complex tax incentives under direct taxes laws constitute a perfect domain for application of ZBB. Far from doing that, the Government does not even care to present a grand total of all direct and indirect tax preferences as tax expenditure statement. Many countries do present annual tax expenditure statement. Indian Government has, on the contrary, introduced an element of opacity.
It has done so by renaming the statement ‘Revenue foregone under the Central Tax System’ in 2015-16 as ‘Statement of Revenue Impact of Tax Incentives under the Central Tax System’ 
This statement now forms part of receipts budget, a document of annual Union Budget. Earlier, revenue foregone statement was presented as a separate document to give requisite focus to tax subsidies or tax preferences. 
Crony capitalism and vote banks politics have thus ensured that ZBB is neither tried as expenditure-cutting tool nor as device to improve outcome/returns from every rupee investment as capital expenditure or as revenue expenditure
Unlike elected Governments, companies are not plagued with populism and crony capitalism. Firms can thus tap ZBB’s potential to improve returns on investment and to perk up growth.
As put by McKinsey & Company, “When ZBB is only about cost cutting, cost cutting is all that ZBB can achieve. When ZBB is about changing the culture, it can keep finding growth and more improvements year after year”. 
In a paper titled ‘How absolute zero (-based budgeting) can heat up growth’ released in January 2018, McKinsey has shared a five-initiatives approach to make ZBB work well. 
In another paper caption ‘Five myths (and realities) about zero-based budgeting’ published in October 2014, McKinsey observes : “Zero-based budgeting frees up unproductive costs and allows those savings to be taken to the bottom line or redirected to more productive areas that will drive future growth”. 
Yet another consultancy major that is bullish on ZBB is Bain & Company. It is pitching for implementation of ZBB in association with certain digital technologies such as Virtual business-process assistants (VBPA) and decision management technologies. 
In a paper titled ‘Upgrading Zero-Based Redesign With Digital’ Bain’s two experts say that many companies are going for what they call zero-based design. Under this, “companies revamp their operating models by analyzing which activities should be performed at what levels and at what frequency”.
They believe that application of ZBB and zero-based design, coupled with appropriate digital technologies, can help companies reduce costs by 25-50% and improve their operational efficiency as digital technologies run on 24/7 basis.
Put simply, ZBB is to organizations what soul-searching is to individuals. 
Published by taxindiainternational.com on 12th June 2018
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