Zero-based cost management: A holistic approach to managing budgets

By: Andrew Clark, Stuart Groves, Hege Nordahl, Otto Waterlander | Published: November 15, 2010

Though world economies show some signs of emerging from recession, cost management remains a top priority and a key performance driver for most companies. Many businesses have weathered the downturn by addressing easily accessible cost reduction opportunities. However, making significant and sustainable cost reductions without threatening performance and competitiveness is more difficult because many companies are unable to systematically identify and analyze the full range of activities undertaken by the business and the associated costs and business impacts. For that reason, there is increasing interest in the concept of “zero-basing” cost and activity levels, an approach in which costs are tackled at the root by reexamining each corporate activity as if it were brand-new. Although the concept of zero-basing is understood in theory, it is often misapplied. A structured and pragmatic approach to zero-basing can help achieve sustainable cost reduction while protecting key activities.

Key highlights

Sustainable cost reductions are difficult for many companies because they are unable to systematically identify and analyze the full range of activities undertaken by the business and the associated costs and business impacts.

Zero-based cost management is a holistic approach that tackles costs at the root by assessing expenses for all organizational activities in a structured, pragmatic, and dispassionate way.

Zero-base analyses target costs in a department, a group of projects, or across organization units, offering greater opportunities to identify structural budgetary problems and required cost interventions.

Conclusion

The continuing global recession has forced businesses to do much more than simple, incremental cost cutting. Our experience is that a holistic zero-based approach, if performed thoroughly, enables organizations to make fundamental choices about how many resources to deploy in pursuit of business objectives and where these resources should be targeted. By pursuing this approach, companies can achieve meaningful and sustainable cost reduction. The approach is practical, pragmatic, and applicable in a range of business circumstances.

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Zero-based cost management: A holistic approach to managing budgets