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Zero-Based Budgeting

Zero-based budgeting is a sustainable cost philosophy and bottom-up approach to rigorously reset the cost base of an organization; identifying inefficient spend and resource usage that can be freed up and better utilized elsewhere. Originating in the Consumer Goods industry, this growth enabler has gained momentum across industries as companies seek to maximize value for their businesses and drive sustainable change.

Why are so many companies talking about zero-based budgeting?

Zero-based budgeting uncovers inefficient spend, allowing companies to reinvest in long-term sustainable growth opportunities—like innovation and product development—by resetting companies’ cost base and ensuring it’s kept lean in the long-term. It’s about making smart choices on where to spend. Zero-based budgeting is also a mind set and cultural change that calls for new roles, responsibilities, and processes. Success depends on accountability, and leadership needs to be invested in the outcomes.

The Advantages and Disadvantages of Zero-Based Budgeting

Zero-based budgeting is not a one-time effort, and it isn’t right for every organization. Before choosing whether or not zero-based budgeting is the best approach for your company, be sure to weigh the following advantages and disadvantages:

Advantages

When done right, zero-based budgeting can significantly reduce costs, and improve efficiency and competitiveness. It has the potential to prevent takeovers, identify and grow top performers, and instill a cost-conscious culture throughout the organization.

Disadvantages

Zero-based budgeting has a reputation of being notoriously aggressive and cutting costs to a minimum while negatively impacting employee morale. To avoid common pitfalls and such extreme behavior, it is critically important for a company to find the right balance and execution approach to implement a zero-based mindset and methodology in a successful and sustainable way.


How to Implement a Zero-Based Budget

There’s a smarter approach to zero-based budgeting. BCG’s nine key steps for zero-based budgeting strike a balance between cost reductions and growth for your sales organization.

  1. Vision. Understand motivation, determine ambition, link the program to strategy, and design a tailored zero-based budgeting program.
  2. Transparency. Create full transparency with a detailed baseline, known value drivers and a rigorous analysis of cost and activities.
  3. Governance. Introduce dual cost accountability that supports decision-making, and enable people.
  4. Target. Lock in business model choices, prioritize saving areas, and establish smart targets.
  5. Zero-Based Budget. Create a granular and holistic view from the bottom up, challenge the budget rigorously, and integrate targets.
  6. Monitoring. Set clear mechanisms for tracking costs, including how to address variances and the reallocation of funds.
  7. Execution. Devise action plans and milestones; implement and follow a variance/reallocation process.
  8. Reinvestment. Reinvest savings in a manner that best drives growth.
  9. Culture. Establish culture of cost ownership with strong performance management, then manage and communicate change.

Learn More About Zero-Based Budgeting

The Power of Zero-Based Budgeting

Zero-based budgeting is more than a one-off cost reduction; it’s a method for transforming your business. Learn how BCG can help.

Read Get Back to ZBB Basics

Get Back to ZBB Basics

When zero-based budgeting uses saved money to reinvest in a company correctly, such as towards promotions and marketing, it can be a tool for success.

Meet Our Zero-Based Budgeting Experts

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