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09/17/2018

THE ZERO-BASED BUDGET (ZBB), ACCELERATOR OF THE DIGITAL TRANSFORMATION?

Digital transformation is impacting all sectors: banking, insurance, catering, etc. Companies have responded by launching significant transformation programs, with invested amounts reaching record levels: €3 billion for BNP Paribas, USD $2.5 Bn for HSBC (2015-2017; [1]), and €950 million invested for AXA (2013-2015 period).

In this context, adopting a Zero-Based Budgeting (ZBB) approach can help in funding the digitization program by generating savings on recurring activities and initiate or even accelerate the transformation. However, to be successful, the approach itself must be digitalized. In short, it's about digitizing the Zero-Based Budgeting process to budget for digital.

The Zero-Based Budget, contributor to the financing of digitization programs

Digital transformation programs generally represent a major investment effort, in CAPEX or OPEX (for example, 55% of Accor's digital initiatives expenses relate to CAPEX, 45% to OPEX [2]). In order not to deteriorate margins or to deprive other initiatives (acquisitions, new markets opportunities, etc.) from the necessary financing, savings are often requested by the General Management and the Finance Department, with a pace similar to the needed investments in digital.

In this context, launching a Zero-Based Budgeting approach makes possible to challenge your cost base – and in particular the indirect ones - by starting from a blank sheet. It also helps in redefining and prioritizing the initiatives and necessary activities at various levels of the organization and eliminating those that do not create value. The effects can be spectacular, as shown in Figure 1 below, showing the results achieved by 3G Capital on Heinz Group and Heinz Europe margins, following the acquisition in June 2013 and the implementation of a ZBB approach.

Image 1 – Heinz margins’ improvements [3]

Thus, launching a Zero-Based Budgeting approach can provide the CFO with the necessary funding for costly but imperative digital initiatives. But financing is not the only advantage that a ZBB approach can bring to a digital program: it can also serve as an initiator as well as an enabler of the transformation.

The Zero-Based Budget as initiator and enabler of the transformation

The Zero-Based Budgeting approach implies the mapping of the activities of the departments / functions / business unit, each activity being seen as a client of the upstream one, and provider of the one that is downstream. These activities are then prioritized and arbitrated, in order to optimize the resource allocation.

Image 2 – Zero-based budgeting aims at the best resource allocation

As part of a digital transformation program, this is a real opportunity to challenge the as-is organization by passing it through a digital screen: how does this activity contribute to the program? Can this activity be digitalized? Is it possible to automate the process or improve the way we work with new digital solutions? Thus, in the bottom-up step of the Zero-Based Budgeting approach, a manager can build his ZBB and identify digital levers of performance at the same time, then depending on the type of initiative, management can entrust him with the execution and associated resources.

But ZBB is not limited to incremental cost optimization, it aims to change attitudes and empower managers by encouraging them to better define their digital initiatives and objectives. It requires identifying the activities with the best returns on investment. In this, ZBB becomes a tool for introducing change into the organization. The launch of a ZBB approach generally corresponds to a good momentum for a global transformation initiative for the company and its culture: reduction of managerial layers, transformation from a product / service-centric organization to a customer-centric ... and digital transformation!

Digitize your Zero-Based Budget to gain in Agility

The budget process is often a cumbersome and expensive process. Several months are generally needed to build this business management tool, through many iterations, to set the highest achievable results. In addition, the implementation of a Zero-Based Budgeting approach usually adds 1 to 2 additional months to the process, for rapidly outdated assumptions. Because of these constraints, the Zero-Based Budget is rarely adopted annually but generally carried out every 3 to 5 years, coupled with the Medium Term Plan.

This lack of agility no longer fits with the rapidly changing context of activities related to digital transformation, which requires changing budget assumptions quickly to adapt to the environment. Digitizing the ZBB then becomes a prerequisite to benefit from its advantages. To do this, a new Target Operating Model for a Digital Finance is required, to speed up the overall process, review activity / cost / investment projections in a more collaborative and integrated way, and circularize more easily needs / capacity between departments’ suppliers and customers.

In conclusion

Digitizing the Zero-Based Budgeting process to fund and accelerate the digital transformation: the CFO has an opportunity to strengthen his role as a business partner to initiate the structuring of an ambitious program.

Nevertheless, steering the structural changes induced by the parallel conduct of a ZBB and a deep digitalization is a true balancing act. Our recommendations to carry out the exercise, and to profit from the benefits of these initiatives are the following:

  1. 1. Establish a governance which integrates the two initiatives in order to prioritize and to bring a shared vision of the transformation
  2. 2. Establish cross-functional teams, as ZBB and digital transformation are also cross-functional initiatives
  3. 3. The management of day-to-day operations can quickly divert attention from the program. Establish a Project Portfolio Management Office, attached to the Executive level sponsor, which will be dedicated to monitoring the consistency of initiatives, of cost reductions and program communication.

 

To conclude, coupling Digital Transformation with a ZBB based approach enables enterprises to “value target” its Transformation spend. Enterprises are at a crossroads with the digital revolution and senior management should take this opportunity to reshape the enterprise for the future while maintaining a disciplined, considered approach.

Sources

  1. 1. Deutsche Bank Global Financial Services Conference, May 29, 2018, https://www.hsbc.com/investor-relations/events-and-presentations
  2. 2. https://www.journaldunet.com/ebusiness/le-net/transformation-digitale-accor.shtml
  3. 3. http://assets.pershingsquareholdings.com/2014/09/2016-European-Investor-Meeting-Presentation1.pdf

 

About Sia Partners As part of our unique Consulting 4.0 approach and Cognitive Leap, Sia Partners has developed a strong expertise and supports its clients on data analytics (DataLab), AI and RPA programmes, from assessing maturities and designing strategies, to deploying programmes and leading the cultural change.

Copyright © 2018 Sia Partners

Any use of this material without specific permission of Sia Partners is strictly prohibited

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