• Jeremy Kay, Partner |
  • Ed Boulton, Partner |
5 min read

In today’s constrained economic environment, businesses need to sharpen their focus on cost and value. This means an inevitable attention on the cost base and managing the cost agenda. But it also means looking for value – activities and business lines that can be enhanced or optimised to drive more value and so unlock growth. It’s not a case of one or the other. To achieve sustainable results, it needs to be both.

One powerful tool in the armoury to help organisations achieve this is the concept of zero basing. It’s a well-known term that’s been with us for several decades now, although the practice has come in and out of fashion and has moved on considerably from its early formats. Essentially, the approach is about carrying out a complete reboot of an organisation’s costs and activities – starting from zero with a blank piece of paper and building an agreed set of costed activities, resourcing levels and budget allocations to best deliver the strategy.

Clearly, there is scope to use this simply to reset costs– say, a 10% or 20% overall reduction across the business – and thereby achieve a significant saving. But in fact, while zero basing is a strong cost reduction mechanism, it’s about much more than that. It is better thought of as a way to strategically realign resources, creating the headroom needed for growth. Rather than being about doing less, it is actually about doing the right things differently.

Regearing in a time of disruptive change

This is especially relevant to the times we’re in now. Think about how fast conditions are moving and changing: the speed of technological change and digital disruption; consumer and customer behavioural shifts; new and emerging regulation; net zero and decarbonisation targets; uncertain geopolitical events and supply chain impacts. The disruptive forces all around businesses have probably never been so pronounced.

With so much changing so quickly, the challenge is that an organisation’s operating model and associated cost base may have become unfit for the new priorities emerging and the transitions that need to be made. In consultant-speak, the operating model may no longer be aligned to the business model. When this happens, organisations become inefficient, ineffective and leak value.

A deep dive into cost and value

Zero basing can have a significant impact in helping to address this problem. It forces the business to ask itself searching questions about spend and allocation of resources. It questions how much value these add, in themselves and relative to each other. It looks for areas of overlap, duplication and wastage. It is particularly strong in areas where there is a degree of optionality, such as support functions where there is discretion over how things are done. It asks whether things could be done differently and more effectively. It shines a deep light and presents options to business leaders in a new way making very clear the risk and value trade offs in decisions about cost.

It is a highly structured process carried out in rigorous detail. Data and analytics tools and techniques are applied to the information to create truly data-driven insights based in fact. There’s a strong science and methodology behind the approach which has been developed and tested over time.

Challenge and debate

But there is also an ‘art’ side to zero basing – and in many ways, this is where the magic really happens. This is when leadership come together and get the chance – possibly for the first time ever – to challenge each other around every aspect under consideration. Is HR’s new portal worth more than logistics’ new distribution management tool? Is this marketing sponsorship a better investment than this training programme in the finance function? Which of these are most likely to help the organisation move towards achieving its strategic goals?

It forces the debate in a fundamental way and creates a different understanding of the business. Leaders and managers who are involved will pick up new ways of thinking about cost and value, risk and reward, that may endure with them for the rest of their careers.

It isn’t easy. It throws up real challenges for people and can be emotionally draining. This is especially the case when they feel that their part of the business or their favoured activities are ‘under threat’. Doing this in the right cultural framework of collaboration, exploration and support is therefore key.

Busting some myths

Zero basing requires time and commitment – but done well will more than repay the effort, usually at a scale of over 1:20. There are also a couple of myths that need to be dispelled.

Firstly, it does not need, nor should, be carried out every year as a kind of annual budgeting exercise. It should be used strategically and sparingly, at big pivot moments or times of challenge. Secondly, it doesn’t have to cover the entirety of the business. It could be limited to one area (so for example we successfully deployed zero basing to look at marketing expenditure for a global business) or division for example. This often applies when there is part of the organisation that is consistently struggling to make a profit or that is regarded as a kind of cost ‘black hole’ in the business. Many organisations have one of these!

Time to zero in?

At KPMG, we have long experience of working with clients through zero basing exercises – and believe that in today’s market conditions, it has more to offer than ever.

Could zero basing be the right move for your business? Ask yourself the following questions:

  • Have your budgets historically been set predominantly set on a last year plus x% basis?
  • Do you have limited visibility of what outputs and value you get from different parts of your organisation?
  • Is your cost base misaligned with your strategic priorities and / or out of line with your competitors?
  • Are you facing significant market disruption or a pivotal moment of change?
  • Do you need to free up funds to invest in future growth areas?

If you’re answering ‘yes’ to most or all of these questions, it may be time to consider taking the zero basing plunge. It could have a lasting, positive impact on how your business performs and runs.