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“Agenda for todayThe Objective of ZBB
The Payoff
123ZBB vs. Traditional Cost Cutting
4 Deloitte’s Approach to ZBB
5 Key Takeaways & Questions
Ed MajorsPrincipalDeloitte Consulting, [email protected]
Ron DimonManaging DirectorDeloitte Consulting, [email protected]
Traditional Models of Expense Management
Companies have tried many approaches to budgeting and managing expenses
Budgets are developed by function, but relatively arbitrary reductions are spread across all functions to meet a budget target.
• For example, a set of final budget “adjustments” that reduce all proposed budgets by 10% or a similar amount
• Tends to encourage “sandbagging,” or artificially increasing funding requests to anticipate eventual reduction
Budget guidance allows overhead budgets to increase by some set percentage over prior year.
• Tends to “embed” a certain cost structure regardless of strategic value
• Some companies (e.g. a large fast food chain) regard this as a “leading practice” since it minimizes effort during the budget process
One-off “strategic cost reduction” program that drives significant reductions in overhead costs.
• Requires significant effort and can be traumatic to an organization
• Can reduce overall cost base but not necessarily change budgeting behavior
PERCENTAGE GROWTH “PEANUT-BUTTERED” REDUCTIONSENTERPRISE REDUCTION PROGRAM
$
Time
Annual increases on embedded cost base
$
Time
Arbitrary reduction ofrequested budgets
$
Time
Significant initial reductionbut similar trend
ZBB - Aligning funding with program efficiency and necessity rather than history
Budgets are not connected to prior year
spending
• Prevents “embedding” of existing spend in the cost base
• Allows spending levels to be set based on necessary activities of a function, rather than historical trends
• Requires more work to understand activities and cost structure
Cuts are not evenly applied across the
budget
• Eliminates common “sandbagging” practices in budgeting process
• Allows for more strategic allocation of planned spend
• Requires more work to analyze and prioritize
Budgets are tied to specific activities and
level of service
• Better aligns spending targets with required activities of a function
• Replaces “do more with less” with “do the right things with the right amount”
• Requires fairly detailed knowledge of departmental activities
Funding is targeted to activities that align
with strategy
• Allows for better alignment of expenditure with overall strategy and departmental missions
• Can reduce incidence of “we’ve always done that”
• Prioritizing activities across various functions can be challenging
Copyright © 2016 Deloitte Development LLC. All rights reserved.. Analytics & Information Management / 5
Getting it right has a payoff
Getting it right has a payoff
We looked at the last 4 years of performance data for a large retailer/department store (over $10B annual revenue) and its nearest 9 competitors.
(Total community includes Target, T.J. Maxx, Ross, Kohl’s, Bed Bath & Beyond, Nordstrom and others)
Many organizations are considering adopting a “zero-based” approach to their planning processes
TRADITIONAL COST CUTTING
ZERO BASED APPROACH
Justifying what to remove Justifying what to keep
Focusing scope on narrower set of costs or cost reduction tools
Leaving no stone unturned by examining every cost area for the broadest
set of cost reduction tools
Improving how activities should be performed (efficiency and effectiveness)
Considering both what Activities should be performed (i.e., doing less) and how they
should be performed
Created focused Initiative Planning and Execution
Developing detailed and comprehensive initiative design, planning
and execution
So it’s not an “either/or” — it may be an “and”
TRADITIONAL BUDGET PROCESS
ZERO BASED APPROACH
Zero Based Budgeting (ZBB) – A budgeting process that allocates funding based on program efficiency and necessity rather than budget history.
Based on our experience, ZBB is widely adopted in public sector and not for profit organizations. However, it is not widely used across the private sector, and if adopted is generally conducted on a select function basis.
High correlation to prior year expenditure levels
Primary organizational focus is on the cost center
Implicit assumption of “steady-state” operations
Approved spending levels are unrelated to prior year
Primary budgeting focus is on the “decision package” or specific service/activity
Explicit challenge to current service levels and
activities
We have developed an approach to zero-based budgeting that incorporates five key pillars
1. Strategic Intent
2. Operating Model / Org Design
3. Governance
4. People, Processes, and Systems
5. Performance Management
Alig
ned
and
Linke
d
• More strategic, with focus on future direction of the organization and immediate priorities
• Incorporates top-down targets / expectations into the process to help define priorities
• Performed on a 3 year cycle basis as strategic priorities should not change
• Looks at expense line-by-line
• Budgets are built bottom-up…rarely top-down targets
• Cycle is repeated annually
Determine business need for upcoming period
Review current costs – line by line – and assess each in terms of ability to meet business need
Communicate new budget and allocate resources
Rollup costs to determine group budget and qualitative savings
Build bottom-up budget – include only the costs necessary to meet business needs
OUR APPROACH TO ZBBTRADITIONAL ZBB APPROACH
This framework has been used to enable sustainable operational change
1. Strategic Intent
2. Operating Model / Org Design
3. Governance
4. People, Processes, and Systems
5. Performance Management
Key questions to be addressed
What is the company’s or division’s strategic intent and priorities? Who are the key stakeholders, what are their expectations, and how should capabilities be
aligned to meet them?
What operating model best aligns with the strategic intent and priorities? What is the optimal organization structure to support the operating model? What is the required cost structure?
What governance model should be established to sustain changes? How can roles, responsibilities, and accountabilities be defined within the company /
division and with key stakeholders? What are the company / division’s ideal service levels?
What processes, tools, and technologies are needed to meet core stakeholder requirements?
What core talent skill sets will be required in the future? What metrics / KPI’s can be established to measure performance and link to return on
investment? How do we benchmark against similar companies for these functions both on a cost and
effectiveness basis? What performance management approach (e.g., balanced scorecard, planning /
budgeting cycle) should be established?
Alig
ned
and
Linke
d
Elements of the Planning Process where we have deployed ZBB Principles
Strategic Plan Financial Plan
Capital Plan
Initiatives
Scenarios/Contingenci
es
DetailBudget
RollingForecast
Areas where Deloitte has used elements of ZBB to drive prioritization
Corporate Strategic Planning group develops strategic plan; targets allocated to major business units
Capital Plan, implementing strategies from strategic plan, identifies costs and benefits from capital projects
Business units identify major operating initiatives and develop pro forma projections of P&L impact
Based on allocated targets, business units (including G&A functional areas) develop summary-level plans using a driver-based model
Business units identify potential economic or market developments (favorable or unfavorable) and project P&L impact and contingency plans
Final business unit plans and targets are cascaded down to the rest of the organization for performance monitoring and expense control
Monthly or quarterly rolling forecast (through end of next year or a rolling 12-18 months) performed using driver-based planning model
Key Outcomes
Program Objectives
• As part of a broader organization cost-cutting initiative, reduce group budget by 25% over 3yr period;
• Reduce dedicated business support, shift toward flexible service model
• Reduce organizational layers and increase spans of control, for improved leadership development
• Retain critical talent throughout organization
Scope
• $265 M in spend, including:‒ Compensation‒ Operating Expenses‒ External Spend
• 350 employees, across more than 15 countries
Key Activities
• Established detailed cost and activity baseline
• Determined sub-functional reduction targets based on external benchmarks
• Redesigned organizational structure, function-wide and within sub-functions
• Conducted detailed external spend assessment, reduced costs through project terminations, vendor consolidation, and other areas; establish external spend governance strategy for future maintenance
~25% reduction
• $65 M in sustainable year-over-year operating cost savings identified
2012: $256 M 2015: $195 M
ZBB case study
Global Pharma Company
The ZBB pilot approach
It is important to develop a multi-phased roadmap that starts with a solid – yet flexible – pilot, which will support the short-term needs and the longer term vision
Mobilization andTraining
0
Stakeholder Input and Baseline Development
1
Future State Design and Requirements2
Roadmap / Summary of Changes3
• Establish program objectives
• Secure Stakeholder buy-in
• Establish Functional Taxonomy
• Complete Financial Planning Solution
• Data Integration Architecture• Scalable and extendable platform
• Deeper planning and analytical functionality
• Expansion beyond Finance into an enterprise wide planning solution.
• Operational Excellence• Continuous improvement in
forecast accuracy and reductions in cycle time
• Improved insights
Solution Considerations
Anaplan solution case studyLeveraging cloud architecture enables real time demand scenario analysis on market changes.
• Agility of a cloud platform to address the dynamic business environment
• Integration of top-down targets with detailed bottom-up budgets
• Real-time scenario modeling
• Self Service for all user
Causal analysis
ERP
Workday HRC
MEI – Trade Spend
GL
MM
AP
AR
Markets
Master Data
Data Svcs
Anaplan Connect
Anaplan Connect
In Memory Cloud
Data Hub Model
S&OP
Demand Planning and Optimization
Workforce Planning
Sales Forecasting
SG&A & Allocations
In Memory Cloud
Dashboards
Excel Reporting on Cloud
Other Visualizat
ion
In-Memory Models
Anaplan Reports
Data Source Data Staging Analytics Applications Reporting
Master Data Management and Data Governance
B/S & C/F
Debt/ Cash Facilities
Inventory M&A
ConsolidationsTransfer Pricing
IFRS Disclosures
Planning MethodsABC
Rolling Forecas
t
Driver Based
StatisticalForecastAllocations
ZBB
P&L - Top Line
Revenue Sales
Cost of Sales Marketing
P&L - OPEXMarketing G&A
WFP Allocations
P&L
B/S
C/F
Regulations
Start where you need smarter planning …Operation
s
Reporting&
Analysis
Top Down
Bottom Up
Strategic PlanningLong
Range Plan M&A
Revenue What-If
KPI’s Initiatives
US GAAP
“Key takeaways Ed Majors
PrincipalDeloitte Consulting, [email protected]
Ron DimonManaging DirectorDeloitte Consulting, [email protected]
• It is critical to define the “Big Picture” upfront• Make sure you know your current planning,
budgeting & forecasting landscape• People, Processes, Technology & Data
• Identify where ZBB will have the most impact
• Enroll a key stakeholder using a financial impact business case
• Implement a pilot program to prove out the benefit
• Go/No-Go
Q A
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