ZERO-BASED BUDGETING (ZBB) An Essential Tool for 21st Century Organizations

“A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero-base) and shifts the burden of proof to each manager to justify why he should spend any money at all. The approach requires that all activities be analyzed in ‘decision packages’ which are evaluated by systematic analysis and ranked in order of importance.” – Peter A Pyher

STEPS in the ZBB PROCESS

The important steps in ZBB are:• Identification of Decision Team, Decision Criteria and Decision

Units to facilitate justification of each eventual Decision Package (component of expenditure) in the organizations’ proposed budget.

• Preparation of Decision Packages. Each package is a separate and identifiable activity. These packages are linked with corporate objectives.

• Ranking of Decision Packages based on Cost/Benefit Analysis.• Allotment of corporate funds to Decision Packages based on an

inverse pyramid ranking system.Decision Packages are self contained modules or proposals seeking funds. Each Decision Package will clearly explain the activity, the need for the item, the amount involved, the benefit of implementing the proposal, the loss that may be incurred if it is not done, and the Opportunity Cost of selecting this activity over others.

Definitions for ZBB Decision ComponentsThe Decision Team – Refers to the identified group of Key Players who will determine the organizations’ Decision Units and the Criteria they and others will use to prioritize Decision Packages and funding allocations.Decision Units – These are the components of the organization for which a Decision Package will be required. They must have a specific manager, have a defined and measureable impact, have defined and measureable functional objectives, and they must have a definable functional activity (set of processes).Decision Criteria – These are the clearly defined considerations that will be used in evaluating and ranking Decision Packages. They can be both subjective and objective in nature. A Criterion could be as objective as Ratio of Revenue to Expense or as subjective as Alignment with Corporate Vision. Criteria definitions must be consistently applied..

FIRST LEVEL ACTIVITY PRIORITIZATION – Know Your Organizations’ MUSTS, SHOULDS and MAYS

The MUST Activities – These are the organization’s activities that must be maintained under any circumstance. The usually represent activities related to maintaining the Core Management Systems. While they are essential, they are not sacrosanct in the Status Quo. They should be regularly scrutinized to ensure they are appropriately scoped. They often suffer, or the organization does because of them from Resource Creep. The SHOULD Activities – These are the activities that – if resources allow – the organization would focus on the increase orientation to Mission, Vision, Values, Goals and Objectives. These activities represent the “Sweet Spot” of ZBB. Any Decision Criteria should support prioritization of SHOULDS and critical determination of which of them Matters Most.The MAY Activities – These are activities the organization might undertake if there were unlimited resources available. Few MAYS make the cut in the ZBB activities of most organizations. Great Decision Teams and Senior Leadership Teams always do a mental sorting of MUSTS, SHOULDS, and MAYS intuitively. However, they also test their assumptions regularly through a more formal process. .

There is Power in Seeking Alternatives (Options) to the Status QuoCharacteristics of Good AlternativesDeveloping good alternatives is an iterative task. Initially, the task is to generate a range of creative alternatives. These alternatives are carefully evaluated technically, in terms of their estimated consequences. They are also evaluated deliberatively, in terms of their relative desirability. New alternatives are generated, joint gains are found and the key trade-offs and uncertainties are highlighted. By the time alternatives are presented to decision makers, they should be:• Value-Focused, meaning that they are explicitly designed to address the fundamental values or

ends of the decision – the “things that matter” or “felt needs”, as defined by the objectives and the evaluation criteria;

• Technically Sound, meaning that in developing alternatives for achieving the objectives, the project team has drawn on the best available information about cause and effect relationships and has designed creative and diverse alternatives based on sound analysis;

• Clearly and Consistently Defined, meaning that all alternatives are defined to a sufficient and consistent level of detail using logically consistent assumptions, and that a base case against which all alternatives can be compared has been clearly established;

• Small in number and high in quality, meaning that poor (dominated) alternatives have been eliminated and those remaining have been iteratively refined to incorporate new ideas and joint gains;

• Comprehensive and mutually exclusive, meaning that individual elements or components of a strategy are combined into complete packages, and that the packages are directly comparable;

• Able to expose fundamental trade-offs, meaning that they emphasize rather than hide difficult but unavoidable value-based trade-offs and present real choices for decision makers;

• Developed collaboratively with the people most affected, because difficult trade-offs are easier to make and to accept when people believe that a thorough search for good alternatives has been conducted and that the best alternatives are on the table.

There is Power in Seeking Alternatives to the Status Quo

Keys to Positioning an Alternative – 1. Orient your group to the problem;2. Specify what matters in the decision;3. Decide how to evaluate whether or not potential

solutions can achieve the objectives; and,4. Create more than one alternatives for decision-makers

to consider.An alternative is a set of actions providing a comprehensive approach to the decision problem.

How to Build a Decision Package

It is easier than you think and the process of building one is more powerful than you ever thought:• Tell the Decision Team WHAT you want to do and WHY that

should matter to the organization;• Tell them HOW you plan to do it. This involves describing the five

(5) primary process activities of your component; • Tell them WHO will perform the processes and WHO will benefit

from the processes, directly and indirectly;• Tell them WHEN the processes are effected and WHY that is the

right time ;• Tell them WHERE the processes are effected and WHY that is the

correct location;• Tell them WHAT IT COSTS in terms of Time, Material, People and

Money; and • Tell them the MEANING OF SUCCESS for the process. WHAT

value does it produce for the organization? HOW do you know the value is being created?

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