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Engaging employees with zero-based budgeting

Zero-based budgeting is increasingly becoming popular among companies, but has not fully appreciated the benefits of it.
Based on a recent global survey by Bain & Company, more companies use the tool as they face more pressure to cut costs. The system is quite popular in companies in the Asia-Pacific where 80 per cent of executives interviewed by Bain for the 2015 report noted their plans to implement zero-based budgeting programmes. And chances that history may repeat itself could show low levels of satisfaction in the use of the programme. Less than half of big companies have reported success from their efforts.
Following our analysis of the experiences of 11 publicly-owned corporations, despite the benefits of zero-budgeting, the system failed to engage employees. These companies were evaluated across three metrics of success: the EBIT margin growth, revenue growth and employee engagement. Glassdoor data showed that less employees recommend the company to a friend, dropping in nine of the eleven cases, by an average of eight percentage points. Observing employee engagement in hundreds of cases, we found out that the decline takes place as the power to lead decreases, top talents leave and morale wavers.
We have seen though how the most successful companies boost employee engagement under zero-based budgeting by using an approach to organisational and business process simplification, which we call zero-based redesign. This method can revive a company's view about ownership, removing the idea that impedes employees from doing their jobs and simplifying the organisation as well as disappointing practices that dampen the enthusiasm of results-oriented high performers. This is visible in one our cases: A manager at 3G Capital reported that before the company used zero-based budgeting to simplify roles and objectives, remove layers of and standardise processes at Kraft-Heinz, he used to struggle keeping pace with a huge number of e-mails that go up to 300, including several unproductive meetings on a regular day. Now, the system has resulted to fewer than 40 e-mails in a day and meetings have become very targeted and well-organised.
A thoughtfully devised, simpler environment should energise people, enabling them to improve performance and earn financial rewards for their results. Higher employee engagement positions a company to increase both revenues and margins faster than competitors over the long term. It also can set the stage for agile ways of working.
How to achieve that vision? First, instead of treating overheads as expenses, regard the programme as an opportunity to reframe them as a multi-year investment in building assets - the capabilities and human capital - that can deliver a sustained competitive advantage. Also, emphasise the central human element of building the organisational muscle for continuous cost improvement. By primarily focusing on technicalities such as cost packages and policies, the odds of success drop dramatically. Lasting results require a highly collaborative process designed to change long-term behaviour.
As with any major change, the CEO and leadership team must be willing to maintain the commitment over the long term, serving as role models and coaches, and sending clear and consistent messages throughout the organisation. As a starting point, companies need to clarify - possibly rediscover - their insurgent mission. Our colleagues Chris Zook and James Allen introduced the concept of the insurgent mission in The Founder's Mentality: How to Overcome the Predictable Crises of Growth. At its highest level, the insurgent mission answers the fundamental question: Why do we exist? The company must understand the insurgent mission and the resulting strategy, spelling out how it differentiates the company in the market.
Next, the company needs to assess its current and past return on operating expenses to inform savings and investment opportunities. The objective is to determine how to weight opex towards those areas of the business that provide the best long-term returns and are most consistent with the insurgent mission, making sure every dollar is a working dollar in service to strategy.
Each organisation is unique, and to maximise results, the effort must be attuned to a company's culture. When designing the zero-based budgeting capability, the ?rst critical questions to answer concern the scope of the programme. Companies need to determine how restrictive to make spend policies, for example, or how deeply to tie incentives to zero-based budgeting performance.
Zero-based budgeting doesn't tell you how to take out the cost. To do that, companies need a holistic approach that tackles complexity just as it tackles overconsumption. In the same way that zero-based budgeting forces companies to scrutinise every dollar of spending, a zero-based redesign enables companies to radically revamp their operating models by analysing which activities should be performed at what levels and at what frequency. It also helps them examine how they could perform these activities better-potentially through streamlining, standardisation, outsourcing, offshoring or automation.
Best-in-class companies reengineer the work to optimise the cost to serve customers. They adapt the operating model to reduce organisational and business complexity, clarify decision making and accountability, and rebalance the portfolio to discontinue dilutive or non-strategic investments. This holistic line of attack delivers a simpli?ed, ?atter organisation that empowers employees by clarifying the link between individual responsibilities and the most critical value drivers in the business.
To avoid losing the hearts, minds and energy of employees, companies need to make a compelling case for change, linked to company strategy, and translate it into meaningful behavior change for employees. The best companies don't design their zero-based budgeting in a back room to be unveiled to the organisation as a fait accompli. Instead, they co-create it with key change agents (e.g., the package owners) across the organisation. With greater empowerment and responsibility, employees can become more engaged to make front-line decisions. Companies can further improve the employee experience and value proposition by channeling some of the savings back into investment in employees.
When most successful, zero-based budgeting creates a new culture of ownership. And feeling like an owner is something that employees can get excited about. Companies can achieve this only through strong leadership, a clear insurgent mission to guide the effort, tuning the zero-based budgeting dials to a company's unique needs, a holistic approach that addresses organisational complexity, and an unwavering dedication to keep employees engaged. This is what separates the companies that establish themselves as cost, energy and growth leaders - trifecta winners - from those that reap no more than temporary savings.
The writer is a partner with Bain & Company. Views expressed are his own and do not reflect the newspaper's policy.