November 2023 Volume 5

OPERATIONS & MANAGEMENT

Leadership and Management FAQ Answered By Joel Strom

This month we have an FAQ about budgeting, and another directly related to keeping customers happy and coming back. As always, we welcome any of your Leadership and Management questions that you would like answered. We just completed our 2023 budgeting process, and someone suggested we try a zero based approach next time. How does Zero Based Budgeting work and what are the advantages of that approach?

for redirecting unproductive costs to more productive applications. I have seen organizations that adopted ZBB build a strong culture of accountability, rethinking, and innovation. Often, managers think that implementing a ZBB process means I need to cut to the bone. That thinking has kept many companies from adopting it. They say we want to be more profitable, but we are not at a stage where we need to chop everything. That notion of ZBB is wrong. Although it may help a very troubled company get a restart, it is really a tool to address cost containment and cost management of a growing, successful company to help it maintain its growth and profitability. Like any management approach, ZBB is not right for every company or leadership team. However, it is certainly something worth considering. It could be the answer to your company’s cost containment initiatives in these inflationary times. I am constantly hearing how important customer service is to the success of a business and it seems that many companies have let it slip in recent years. Am I correct, and what can I do in our company to ensure that we continue to create exceptional experiences for our customers?

This is a great question to address now since if you decide to adopt a zero-based budgeting approach, you don’t want to wait until the end of the year to begin the process. Zero Based Budgeting (ZBB) is exactly what the name implies. It is a technique for building a budget from zero in all line items. In doing so and starting at zero, it forces the organization to take a really hard look at every dollar in the budget. I have found in my experience the results of the process can be very productive and profitable. According to McKinsey & Company, ZBB can reduce SG&A costs by as much as 10 to 25% in less than a year. I would agree with that reduction in SG&A, but I have found that the benefits of ZBB can go well beyond simply your SG&A expenses. Over the years, as companies grow and as the annual budgeting process continues, many times the discussion revolves around simply how much more we have to allocate for a particular expense. Kind of like what happens when an employee is given an annual percentage increase. In a few years they are being paid much more than the going rate for the position. With ZBB a manager’s focus moves back to justification of costs and questioning if there is a better, more innovative, and less costly way to do what has to be done. Implemented correctly ZBB provides a means for assessing all of the company’s direct as well as indirect costs. It can also be a tool

I agree, many companies seem to have forgotten the importance of their customers and what needs to be done to ensure they do in fact remain customers. It seems like some companies have sacrificed attention to customer needs in order to cut expenses. Although in the short term, those companies may see some small decreases in operating costs and thus possible short term increases in profitability, they may be overlooking what the long term cost in lost customer loyalty may be. Most of us are not in a business where the customer doesn’t have other choices. Our competition is eager to pick off any of our unsatisfied customers.

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