The fall and rise of zero basing

Rapidly changing business models demand increasingly agile responses, as resources shift to support strategic objectives. The true value of zero based cost management lies in driving trade-offs between risk and value, thereby facilitating this need to constantly direct resource to the point of greatest strategic worth.

The volume of articles published in 2017-18 alone stands as evidence of the resurgence of zero basing. Commentators point to the various forces at work which have propelled it back into the collective consciousness of business leaders:

• a drive for more radical and creative approaches to delivering value and unlocking the status quo
• changing attitudes to operational risk management
• smarter, more agile organizations needing to redeploy resources quickly.

However, references to the approach as being a form of ‘dark art’ or an unknown ‘secret sauce’ in the process of cost reduction only serve to mystify, as do the limitless efforts to re-brand and conceptualize what is in fact a straightforward technical process.

There is no doubting its potential value. Done well, zero basing can help to drive the most granular level of cost transparency, introduce new levels of cost conscious behavior and aggressively reallocate both funds and capacity towards those areas where they can deliver the greatest value. Clear and proven techniques used regularly in both the private and public sector help to demonstrate its effectiveness in cost optimization, particularly where a clear understanding of the activities, unit costs and productivity levers are made transparent and constantly challenged.

However, it fell out of favor following its introduction over 40 years ago, with some executives at the time increasingly seeing it as unwieldy, labor intensive, highly disruptive and ultimately not delivering to the bottom line. A potentially powerful process was falling foul, it seemed, of basic failings in application.

KPMG professionals see some early and disconcerting signs of what we regard as similar mistakes being repeated which, if not countered, could likely result in a comparable fall from grace.

Specifically five core shortcomings are at risk of being repeated across multiple organizations:

• over-emphasis on zero basing as a technical process rather than a human process
• unwillingness to change attitudes to risk
• poor focus on materiality and value
• failure to create constructive tension by initiating difficult data-led debates on priority choices, value and risk
• lack of attention on driving long-term value from zero basing.

A new approach is required, one that builds on the principles of how private equity organizations create value. They apply a relentless focus on engaging with leadership to own and drive results, testing historical attitudes to risk and prioritizing resources to activities that create the most value. Put simply, getting leadership to re-think their organization through the eyes of an external investor.

Hardwired into this approach are a set of core principles which can help drive a compelling and differentiated approach:

• a focus on evidence-based decision-making to build consensus
• deal quality analytics to remove emotion in politically charged board rooms
• the highest standards of rigor in governance to drive pace and cadence.

These same principles we contend must also be placed at the heart of zero based cost optimization if the process is to succeed this time around.

Doing this well helps to drive a fundamentally different conversation and perspective on how the work gets done in an organization. Focusing on the following, can create the conditions required for zero based success:

• prioritize human factors over a technical process
• focus ruthlessly on value creation
• inject tension into the system
• tackle attitudes to risk head on
• focus attention on driving long-term value from zero basing