zzb in planning

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Strategic Mana gement Journal, Vol. 2, 1-14 (1981)

Zero Based Budgeting in the PlanningProcessJAMES C. WETHERBEUniversHy of Houston, Houston. Texas, U.S.AJOHN R. MONTANARIArizona State University, Tempe, Arizona, USJi.

S U M M A R YAn attempt is made to integrate the zero based budgeting (ZBB) procedure into the firm'splanning process. Previous studies have failed to provide an integrative framework for theapplication of ZB B which m ay accoun t for some of the conflicting resu lts obtained in previousZBB p rogr am m es. Ne xt, the results of an em pirical assessment of the effectiveness of the ZBBintegrative framework in ser\ice oriented organizational units are reported. Strong support isevident for the ZBB plannin g framework developed here using constituency oriented indicatorsof effectiveness.

Zero based budgeting (ZBB) has emerged in recent years as a controversial ap pro achto planning and budgeting. The discussions and debates of the pros and cons of ZBBhave generally been based on opinion rather than rigorously designed and conductedempirical research (e.g. see W ildavksky and H am m an n, 1971; Pyh rr, 1977). Theproliferation of these anecdotal reports of the successes and failures of ZBBprogrammes was primarily due to two factors:

1. the failure of proponents of ZBB to integrate ZBB into the firm's overallplanning process, and2. an absence of research designed to assess the effectiveness of ZBB in thatplanning process.This paper addresses both of these factors. First, a framework is proposed whichexplicitly recognizes ZBB as an integral part of the planning process. Second, tbe

results of a field study utilizing ZBB as a primary component of the planning processare presented and discussed.


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J. C. Wetherbe and J. R. Mom anariseveral authors have proposed both normative and descriptive models of sevadd itional facets of the planning process. Fo r exam ple, Mintzb erg (1979) discussesgoal formulation process in detail and relates it to the decision m ake r's relative poOther authors (Kahalas, 1977; King and Cleland, 1977) stress the impactenviron me ntal forces o n strategic decisions. Similarly, Bem elmans (1979) suggests a needs analysis must be condu cted con curren t with the environm ental scan to estabcriteria for evaluating strategic alternatives. The types and mo des of strategic decima king ap pro pria te at va rious hierarchical levels were discussed by Carlson (1978)Naylor (1979). Finally, several authors incorporate the duration of the planning review cycle into their models (e.g. Katz, 1978; Nadler, 1978).Lin (1979) incorporated budget generation into the planning process. He suggthat fixed or traditional incremental budgets (TIB) are inappropriate for foperating in today's dynamic business environment. According to Lin, more flexitraditional budgets should be used by managers in production and sales units whbudget changes can be easily tied to volum e o r ou tpu t va riations. How ever, in seroriented units where quantitative output measures are not available, zero babudgeting is more appropriate.Ta ble I. Com parison of traditional incremen tal and zero based budgeting

Traditional incremental budgeting Zero based budgeting

4.

Changes in amounts based on incre-ments differing from prior approp-riations onlyJustification of magnitude (amount) ofincrement only

Reference frequently made to base caseor previous level of appropriation

All programmes perpetuated unlessclear and dramatic evidence suggestsabolition from budget

Review and justification for ;o/a/e xpditures (not just incremental chanfor each programmeJustification from zero for every gramme, reconsidering basic funfor programmes and any incremechanges for next fiscal yearNo base case: defence of entire burequest, not simply changes from vious level of appropriation, musreference pointContinuation of each programme qtioned and must be docu m ented: approach encourages real locat ionfunds to new programmes when programmes cannot be fully justifiebetter use of resources is identified

W etherbe (1976) summ arized the differences between TIB and ZBB (see Table 1)agreed with Lin that m anufac turing expenses can utilize a mo re traditiona l budg e


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Xero Based Budgeting in the Planning Process

A nticipation refers to the use of scann ing and forecasting proce du res to provide theility of occurrenc e. The second activity is the determ ination of the un it's existing

Time


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4 J. C. Wetherbe and J. R. Montanarithese four activities are presented in Figure 1 with their p ropo sed imp lementsequence.The major thrust of this study was to inco rporate the budget developm ent printo an operational planning framework and to empirically test the relative merZBB as comp ared to TIB . Lin (1979) pro\^des a detailed discussion of the role obudgeting process in corporate planning but fails to present research support fomodel. The following discussion will explain the planning framework illustratFigu re 1. Results of an empirical test of that framew ork are reported in a later seAnticipationThe first activity in the planning process, an ticipatio n, involves three com po nen t tScanning, the first of these tasks, is a review of the unit's current operations aprojects scheduled for implementation during this planning cycle. Using themodel, previous costs associated with these operations and projects would formhistorical base on which the new budget is built. A ZBB procedu re would also use operations and projects as a base but only to describe the initial budget areas considered.Once this initial scan is complete and the operations clearly delineated, then thmanage r should decide on the prim ary opera tional focus of the unit during the prplanning cycle. This decision is usually implicit in the TIB model since the labudget allocation is typically given to operations that historically accounted folargest part of the budget. ZBB forces the man ager to rank order o r weight opera tareas or projects in order of importan ce to the effectiveness of the un it. F or exathe data processing unit in an R & D firm may have as its primary operational the support of scientific projects. A less important function may be to prprogramming support for the payroll department. In another type of firm the relimportance of these two operations may be different.

The next task under the anticipation activity is to forecast the levels of expchanges in the operations of the un it. This would include increases or decreases demand for the unit's products or services. Also included here are forecasts oeconomies expected from improvements in employee or operating system efficand the effects of inflation on unit expenses. If the manager expects a 12 f)erincrease in the cost of providing the unit's primary service during the planning cthen this must be incorpo rated into the budge t regardless of the budg eting mode ! DeterminationThe determ ination activity (Figure 1) of the plann ing p rocess starts with an audit unit's capabilities evaluated in light of the results of the anticipation activity. Th


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2,ero Based Budgeting in the Planning Processoperational planning be followed prior to generating unit budgets. This preparatoreffort will facilitate budget generation and produce more accurate and meaningfuoperating budgets.FormulationLin (1979) indicates that budget generation should start with the setting of objectivesConsistent w ith this view, the form ulation activity (Fig ure 1) in ou r framew ork sta rtwith the objective setting task. Morasky (1977) provides an in-depth discussion of thnature of organization objectives. He defines objectives as manifest statements thadescribe the specific state a receiving system should attain in a specified time periodObjectives must be reasonable, measurable (desired level and range), and have a timhorizon specified. They m ust be directed tow ard the operation al areas described in thprevious planning activities.Budgets should be numerical representations of the costs and benefits associatedwith the unit's operations and/or projects. Since the unit's objectives are based on athoro ugh analysis of the unit's ope ration al areas in our framework, budg ets should alsobe numerical reflections of unit objectives. This task is where the application of theappropriate budgeting model is most important. Prior activities and tasks areap pro priate regardless of the budgeting m odel used with the major difference being thsource of operational information. However, ZBB establishes a rank ordered list ooperational areas from a review of unit requirements and projected demands for theunit's products or services, whereas TIB uses historical budget data to delineatoperational areas.

Several authors (e.g. Lin, 1979; Wetherbe, 1976) have proposed that operationaareas specified in historical budget data may accurately reflect the primary focus foroutput oriented units since the same quantitative criteria are used to evaluate uniperformance every planning cycle. Therefore, the sales dep artm ent's prim ary focus ialways to promote sales and a sales budget based on expected increases over the lasplanning cycle may be ap pro pria te. How ever, for service units where operation al areaand their relative importance are usually shifting from one planning cycle to the nextthe ZBB model, which requires regular review of each operation area and itsimportance, should be more effective.AssessmentThe final activity in the planning process, assessment (Figure 1), involves thedevelopment of detailed control procedures to assess the adequacy of the planningframework and overall unit performance. These procedures must be based on thebudgets developed during th e formulation activity and shou ld specify acceptable ranges


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6 J. C. W elherbe and J. R. MontanariData from control measures are typically used in the form of negative feedbackexception reporting. As long as actual outcomes fall within the specified rangoperational or planning modifications are reserved for the scheduled time in

temporal planning cycle. However, if unexpected deviations from acceptable limapp ear, then an imm ediate review an d/o r modification of the ap pro pr iate pla nnin g aoperational processes is required. Regardless of the type of feedback, positive negative, it serves to guide the future activities of the op era tion al pla nn er as show n the feedback arrow in Figure 1.In sum, several authors (e.g. Lin, 1979; Wetherbe, 1976) argue for the inclusionbudget generation in the operational planning process. Lin provides a partframework for that integration in his discussion of an integrated budgeting systeDrawing on Lin's work, we have developed the expanded operational planniframework described above.Two main propositions were developed in our discussion:1. The integration of budget generation into a general planning framework wimprove the quality of the planning effort.2. TIB is more appro priate for ou tput oriented units while service oriented uncan more effectively utilize a ZBB planning model.

TTie following section describes a field test of the second proposition while controllifor the first.

A P R E L I M I N A R Y T E S T O F T H E P L A N N I N G F R A M E W O R KData used for this research are based upon a field test spanning two years. Users separa te, but very similar, com puting centres at three u niversities pa rticipate d in tstudy. O ne com puting centre was used as a test gr oup while the oth er two were used control groups. The test group used ZBB as an integral part of the planning procewhile the control group s continued to use only incremen tal bud get p lan nin g. AH thrcom puting centres used an integrated p lanning framew ork. T hu s, the m ain differenamo ng the centres was the budgeting model used. Some relevant area s of c om m on aliamong the test and control groups are listed in Table 2.The fact that the data are based upon the use of ZBB budgeting in a universiTable 2. Similarities of test and control groups


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Zero Based Budgeting in the Planning Process 7puting centre is particularly beneficial and ap pro pri ate for the proposed research.

cF arla n, 1971; 1973; Gr indla y, 1975). C om pu ting functions tend to be very

ally included in a university com pu ting centre provide a rigorou s environm entfield testing the relative effectiveness of the ZB B budgeting model in service o rientednits. Accordingly, a successful application of ZBB in this service unit would provide

for rapid co m puting ca pabilities. Co nseq uen tly, the major focus of a university'sZBB model is evaluated in terms of its

vities. Objectives of the com pu ting cen tre, in orde r to be user oriented, m ust focus

1. Keypunch machines2. Work areas (tables, chairs, storage facilities)3. Consulting assistance for students4. Consulting assistance for faculty5. User documentation (reference manuals, user's guide, newsletter, etc.)6. User train ing sessions7. Programming services for user projects8. Com puting equipmen t9. Processing of com puter job s

10. Specialized software11. Equipment access12. Computer terminals13. Computer plot t ing14. Optical scanningFor the test group, a ZBB model was used to establish budgets for the previously

TIB to allocate resources to these services.


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8 J. C. Wetherbe and J. R. Montanarilevel of that service that sho uld be provided by the com pu ting c ent re. This conc eptested via the following null hypothesis:

Hpl: Two years after implementing ZBB, the improvements in the correlatbetween the importa nce and level of services offered will no t be g reater for test group than for the control groups.An appropriate test of unit effectiveness must also include some indication of differential impact of a ZBB budgeting progra m m e versus a T IB pro gra m m e on o veunit performance. Since performance is measured as the level of objectaccomplishment (Steers, 1977) and objectives are user ori en ted , it is on ly reason ab leevaluate the quality of the services provided from the user's perspective. Only facu

users were included in this study. Fa culty m emb ers were the only u sers who requ iboth research and instructional computing support continuously during a planncycle. Hypo theses 2 and 3 address user attitudes tow ards co m pu ting service effoHo2: Two years after implementing Z BB , attitudes tow ard the com pu ting centsupport of instructional activities will not indicate a greater improvemamong faculty in the test group than among faculty in the control grouHo3: Two years after implementing ZBB, attitudes toward the computing centsupport of research activities will not indicate a greater improvement amo

faculty in the test group than among faculty in the control groups.Two years represented two planning cycles for ail participating computer centrWe believed that the use of two plan ning cycles wo uld h elp atte nu ate the po ssible effeof external and internal confounding factors such as a random surge in demand computer services or a 'Hawthorne Effect'.

DataTh e instrument used for dat a collection was a ques tionn aire consisting of 16 questioD ata used to test H oi , derived from 14 qu estio ns p erta ini ng to th e difTerservices, was provided by the computing centres. Respondents indicated thassessment of both the im portanc e and the level of service for each of the 14 servicesencoding their responses onto seven point Likert type scales. A then-posttmethod ology was used to tap user attrib utio ns of im po rtanc e for the 14 services listTerborg, Howard and Maxwell (1980) discuss the merits of using this methodolorather than the traditional pretest-posttest metho dology. Users were asked whetheparticular service was more important two years ago or now. For example:Work areas provided (tables, chairs, storage facilities)


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Zero Based Budgeting in the Planning Process 9Responses were recorded on seven point Likert type scales as before. For example:

M ore adeq uate then : : : : : : : : M ore ade qua te nowNo differenceHow adequateNow Very po or : : : : : : : : ExcellentThen Very po or : : _: : :. : : : ExcellentThis procedure was repeated for each of the 14 services.

Hy pothese s 2 and 3 were tested using da ta ge nerated from two items designed toprovide an overall assessment of the computing services available to supportinstructional and research activities. Specifically, users were asked to evaluatecom putin g services available to su pp ort instruction al activities. Ne xt, users were askedthe same que stion rega rding research activities. An exam ple of the question form at is:Overall, please evaluate computing services available to support your instructionalactivities.M ore im porta nt then : : : : : : : : M ore imp ortan t nowNo difference

How ImportantNow Extrem ely low : : : : : : : Extrem ely highThen Extrem ely low : : : : : : ; : Extrem ely high

M ore ade qua te then : : : : : : : : M ore ade qua te nowNo difference

How AdequateNow Very po or : _: : : : : : : ExcellentThen Very po or : : : : : : : : ExcellentSubjectsAll faculty members who had actively utilized computing services at their respectiveuniversities for the past two or m ore years were surveyed. Twenty-five faculty memberswere in the test group while control groups I and II comprised 14 and 27 facultym em bers, respectively (n = 66). Active users were detertnined from the com pu terutilization reporting system at each university. Any faculty member who had one ormore active accounts for each semester over the prior two year period was surveyed.The two year mitiimim i requireme nt was necessary since responde nts were required toindicate attitudes two years in retrosf>ect. The chairpersons of the computer servicescommittees and the directors of the computer centres at the three institutionsdistributed and collected the questionnaires within their rtlpective institutions. None


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10 J. C. Wetherbe and J. R. Montanaritreatment to be considered actualized, the following conditions were necessary orleast desirable.

1. ZBB budgeting must be executed properly a nd successfully. T his con dition wconsidered to be satisfied in that the planning committee successfucompleted the ZBB exercise on an ann ual basis for two p lann ing cycles and wable to achieve agreement on the resources to be allocated to the differcomputing services. A further indication of the operational success of programme is that after the first planning cycle using ZBB, the planncommittee unanimously adopted ZBB as their ongoing approach to budgplanning.

2. Any budget increases am ong the test and control group should be com para bThis condition was necessary to prevent one grou p from being able to expaand improve computing services due to additional resources not availableother groups. This condition was met in that during the field test all thinstitutions were being granted budget increases of app roxim ately 6 pier centcover inflation in the cost of equipment, supplies, and personnel.

ResultsFor Hfli, data analysis consisted of performing correlation analyses between importa nce and service level of each service for the then-test and posttes t time per ioTh e correlation coefficients were transformed using Fisher's Z trans form ati(Bruning and Kintz, ! 977). The Z values were then used to compute net improvemscores for the test and control group s by sub tracting then-test Z values from posttestvalues. These scores were used to test the improvements of individual services atotalled to test the overall improvement of all services combined. The results of thecom putatio ns are presented in Tables 3 and 4 . The scores of the test gr ou p are highthan those of the control group. This provides support for the efficacy of ZBB in tservice oriented unit. The net improvement scores were used to conduct /-tests fstatistical testing (Table 5). The results of this test indicate the impro vem ent of the tgrou p is significantly greater than that of either control g ro up . Therefore, su pp ort the positive relative influence of the ZB B bu dgeting mo del on me eting user d em an dsevident in Table 5.

A possible and understandable objection to the previous analysis may be theach of the 14 services was considered equal in importance. A second analysis wconducted which was designed to consider the relative imp orta nc e of each service. Aimportance index was computed by dividing the mean importance score for easervice by the total of all mean im po na nc e scores. Th e result was a relative im po rtan


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Zero Based Budgeting in the Planning Process 11

2c 000000000( ifSrn


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12 J.C. Wetherbe and J. R. MontanariTab le 4. Sum ma ry of results

Hypothesis

HQ I : Im portance and adequacyof serviceIndexed Analysis

Ho2: Attitudes towards supportfor instructional activities

Ho3: Attitudes towards supportfor research activities

Gr oup

TestControlControlTestControlControlTest

ControlControlTestControlControl

I11I11

111I11

N

SeeTable 3

251427241427

Meanscore(before)7-08645-70996-71464-58563-48994-61143-13-53-43-43-53-5

Meanscore(after)

14-65698-30459-1767

10-39255-72316 3 7 9 95-94-84-75-64-74-8

Net improvem(after - befo

7-57052-59462-46215-80692-23321 76852-81-31-32-21-21-3

Ta ble 5. Significance between test and con trol gro up sHypothesis

H gl : Im portance and adequacyof service

Indexed Analysis

Ho2: Atti tudes towards supportfor instructional activities

Gr oups

Test andcontrol group I

Test andcontrol group 11Test andcontrol grou p 1Test andcontrol group HTest andcontrol group I

; value

1-751-922-453-302-55

Degrees offreedom

2626262637

Significleve

*


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Zero Based Budgeting in the Planning Process 13

ups I and 11. A lso of interest is that altho ugh the test grou p started with the3-1, it finished with the highest score 5-9. Ta ble 5 indicates tha t th e testp's relative improv em ent is significant at the 5 pwr cent level. Th erefore, these d ata

Lastly, faculty members were asked to evaluate computing services available toain, the test gr ou p scores indicate greater imp rovem ent than th at of either of the twos (Table 4). As in the previous discussion, the test group started with the< 005) differences between the test group and both control groupw which provides

D I S C U S S I O N A N D C O N C L U S I O N S

ll hypwtheses which cover three prim ary a rea s of user dem and in this researching were strongly rejected. One m ay conc lude th at in this service oriented un it, theapplied in an integrated plann ing framew ork resulted in higher quality uservice when com pared to the standard TIB m odel. Th us , Proposition 2 received strong1 received indirect sup po rt. How ever, a caveat is in order here.

The results obtained may be due to factors other than the ZBB methodologj' (e.g.izations were considered and the samp le was selected by convenience, the results

Given the limits of this study, the results provide s trong s up po rt for the use of ZBBch is inco rpora ted into an integrated plan ning framew ork for service oriented

could result in failure. N ext, the m ana ger can have some confidence that a wellloped and implemented planning p rogram m e using ZBB should result in superior


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14 J. C. W etherbe and J. R. MontanariBemelmans, T. 'Strategic planning for research and development' . Long Range Planning,

April 1979, pp. 33-41 .Bruning, James L . and B. L. Kintz. Com putational Han dbook of Statistics. Scott , Foresman aCompany, Glenview. Illinois, 1977.Carlso n, Th om as S. 'Long-rang e strategic planning ; is it for eve ry on er. Long Range PlanninI I , June 197B, pp. 54-61 .Grindlay, Andrew. "Long range planningsome d o's and do n' ts or what the bo oks on plannido n't tell yo u'. Proceedings of the Sixth Annual Seminar for Directors o f Academ ic Com puti

Services, 1975, pp. 13-19.Higgins, Jame s M . 'Strategic decision m akin g: an organ ization behavioral perspectivManagerial Planning, 26 March-Apri l 1978, pp . 9 - !3 .Kahalas, Harvey. 'Long range planning-, an open systems view'. Long Range Planning,October 1977. pp. 78-82.Katz, Abraha m. 'Planning in the IBM C orpo ration' , Long Range Planning, 11, June 1978, p2-7 .Kin g, William R. and David 1. Cleland . "Information for m ore effective strategic pla nn ing '. LoRange Planning, 10, February 1977.Lin, W. Thomas. 'Corporate planning and budgeting: an integrated approach' . ManagerPlanning, 27. May-June 1979, pp. 29 -33 .Lucas, Henry C , Jr. 'A descriptive model of information systems in the context of torganization'. Database, W inter 1973, pp . 27 -3 9.McFarlan, Warren F. 'Management audit of the EDP department ' . Harvard Business RevieM ay-Ju ne 1973. pp. 131-142.M cFa rlan, Warren F . ' Problems m planning the information system'. Harvard Business RevieM arch-April 1971, pp. 75-89.M intzberg, Henry. 'Organizational power and go als: a skeletal theory ' , in Scbendel, D . E. aC. W. Hofer (editors). Strategic Man agement: A New yiew of Business Policy and PlanniLittle, Brown and Company, Boston, 1979.Morasky, Robert L. 'Defining goalsa systems approach'. Long Range Planning, 10, Ap1977, pp. 85-89.Nadler, Gerald. 'Corporate planning: a systems view". Long Range Planning, 11, Decemb1978, pp. 67-78.Nay lor, Tho mas H . 'Organizing for strategic plann ing'. Managerial Planning, 28, July-Augu1979, pp. 3-17.P*yhrr, Peter A. 'Zero-b ase bu dg eting : Peter Py hrr defends his brain child ', MBA, April 1977, p25-31 .Stanford, Melvin J. Management Policy, Prentice-Hall, Englewood Cliffs, N.J.. 1979.Steers, Richard M. Organizational Effectiveness, Goo dyear Publ ishing Co mp any, SanMonica, 1977.Terborg, James R., G. S. Howard and S. E. Maxwell. 'Evaluating planned organizationchange: a method for assessing alpha, beta and gamma change'. Academy of ManagemReview, 15, 1980, pp. 109-121.W etherbe, James C. 'A general purpose strategic planning metho dolo gy for the com putin g effin higher edtication: development, implementation and evaluation'. Unpublished PhDissertation, Texas Tech. University, 1976.

Wildavksky, A. and A. Hamm ann. 'Com prehensive vs. incremental budgeting in the dep artm eof agriculture' , Planning-Programming-Budgeting, Mackham Publ i sh ing Compan


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