When companies establish their annual marketing budget for the coming year, they often look at their most recent past budget. It makes sense; they can investigate whether they spent too much or not enough, in the right or wrong places, and with what sorts of outcomes. But such an approach also sets a sort of implicit threshold, and in that situation, it is easy for costs to climb quickly, as more and more money gets added to the budget each year.
In response, many companies are rediscovering a budgeting tactic that was first introduced in the 1970s. Called zero-based budgeting, it mandates that each department start fresh, as if it were brand new, without any previous budget to take into account. Each cost thus must be justified anew, rather than just assuming that spending should continue automatically.
The renaissance of this method is encouraged greatly by the availability of expanded data, intelligent technology, and automated approaches. Because they can take a closer look at granular spending data, the managers in charge of creating the budgets can avoid unnecessary costs, such as cushions that might have been inserted in the past to protect against a proverbial rainy day.
At Unilever, the application of zero-based budgeting led to a radical reorganization of its use of external advertising consultants. It will cut the number of creative agencies it works with by half, and it plans to reduce advertising spending by about 30 percent. As a result, Unilever expects to save $6.4 billion in the next several years, which it will reinvest in other areas of the company.
But not everyone is on board. Even as the percentage of companies that use zero-based budgeting has grown, estimates suggest that it still has been adopted by less than 40 percent of companies. For some, sticking which what they have done in the past may be too compelling.
- Should companies adopt zero-based budgeting? Why or why not?
Source: Nina Trentmann, “European Companies Use Old-School Budget Tactics to Cut Costs,” The Wall Street Journal, April 7, 2017