Zero Based Budgeting in Outsourcing

A recent research report from McKinsey found that the number of corporations using zero-based-budgeting (ZBB) has increased more than five-fold over the last three years. What is ZBB? It is the process of starting from scratch each year to build a budget based on forecast need versus historical trends. Traditional “delta-view” budgets assume the budget for the prior period was correct, and adjusts as needed.

ZBB is time consuming – it’s a bottoms-up build that takes significantly more effort than the delta-view budget. But the benefits are compelling. Delta-view budgets tend to become bloated over time because department heads are hesitant to relinquish prior year budgets. McKinsey cites one client who realized 11% savings in operations 4-months after committing to ZBB. On average, companies reinvest about 40% of their savings back into the business to drive additional savings or efficiencies.

The results are impressive – why not use them in outsourcing agreements? Fine Line’s adaptive sourcing approach enables this type of flexibility.

At Fine Line, we encourage clients to dream big: don’t settle for simply being competitive. Set your goals to be a leader in your market segment. Establish a culture that sets a high bar for measuring success. I can think of few other levers that will drive high-achievement than ZBB.

Few CFO’s would argue ZBB is a bad idea, so why do so few companies do it? Well, it’s hard, and it takes time because it’s thorough, rigorous, and transparent.

One of my biggest frustrations in sourcing advisory is echoed in client complaints of lack of supplier focus on innovation. Best practices in vendor management have shifted the traditional stagnant outsourcing agreement to a more nimble and agile adaptive sourcing agreement. Part of adaptive sourcing is, in effect, ZBB whereby the client and the supplier sit down periodically and revise their plan for the road ahead, not behind.

ZBB should be part of any IT Strategy, including Cloud and Data Center Strategies in order to stop the value leakage. ZBB creates a contagious culture of excellence which drives both supplier and client to bump-up their performance.