Zero Based Budgeting: Make efficiency improvement an integral part of your firm's DNA

Whether to keep dry powder for when the economy picks up, or be prepared in case economic uncertainty continues, now is a good time to look for efficiencies in your organization.

COVID-19 has taken most of the world by surprise by its suddenness and global reach. While initially business and political leaders thought it was a matter of weeks before things would go back to normal, it is now clear that the pandemic is with us for quite some time. It might even come back every year, which will add to economic uncertainty, and make it far more difficult to plan ahead: as a business leader, should I anticipate a potential pick up of the economy fueled by e.g., a combination of pent-up demand, renewed consumer confidence and perhaps economic stimulus packages, or should I get prepared for a prolonged state of depressed demand, low investor confidence and recurring flare-ups of infection and uncertainty? Should I plan for a V-shape, U-shape, swoosh-shape, L-shape or even random-shape recovery?

Discussions with our Financial Services clients in the past few months in Asia (mostly over phone, video conferences or in mask-on, social-distance compliant meetings) reflect a certain level of anxiety, past the immediate reaction of kicking-off (or dusting off) their Business Continuity Plans to allow for employee safety, work from home and ensure customer service. Occasionally, some clients have asked us to help them prepare such BC Plans in parallel to their getting organized to face the COVID situation, as they felt unprepared for working under sub-optimal conditions for a prolonged and potentially recurring period. But beyond this, we are now seeing more clients ask questions on the mid-term recovery and how to prepare for it. Increasingly, these conversations have led to a small set of 3 "safe" certainties: 

#1 – there are always things to learn from the worst crises -- Whether looking back at SARS or even at those COVID-affected markets in Asia that seem to be on the way to resuming some level of normalcy in business operations, it is very clear that companies have learnt a lot on what to do the next time around. In fact, when looking at e.g., how Hong Kong has addressed the market, one can clearly trace the relative success of the fight against COVID to a few good practices: individuals have taken on themselves to quickly wear masks in public at the first signs of crisis in China (even now, a vast majority of individuals in the streets, in shops, are wearing masks), while companies have quickly launched preventative measures that have allowed for avoiding in most cases to shut down operations. For example, at a large multinational Insurance client in Hong Kong, coming into the building, you will be greeted by a security person armed with a thermometer to take your temperature – a hand sanitizer gel bottle is available for you to clean your hands. Getting in the elevator, the floor buttons are covered in plastic for easy hourly cleaning, and yet another bottle of hand wash has been fixed to the handrail. Once getting to the reception lobby, yet another bottle sits atop the counter and another one waits for you in the meeting room while seating is limited to practice social distance. And of course, masks are "de rigueur" for meetings. In our own office, and even before COVID, handwash gel has been available, that started when SARS struck the city. In many ways, the right reflexes and discipline became part of our individual and company DNA to get prepared for a potential recurrence of SARS (SARS did not come back, but old habits remained well anchored in everyone's mind).

#2 – Self-reliance is best – our conversations with clients make it very clear that while government stimulus packages will be helpful and welcome, the uncertainty of "how much" help and "when" this helps is likely to come, combined to the uncomfortable feeling that these measures will likely be of a "one-time" nature, firms have to start preparing themselves to take the brunt of measures to operate in this new normal. In Asia, growth is still prevailing in business conversations (even if GDP figures have taken a hard hit in recent past and mid-term projections). However, we have seen much more focus at our clients' on going back to the Budget as the main tool for exerting good discipline on revenues and costs.  And while revenues are harder to predict, costs are easier to control.  The discussions between Business Heads, Senior Management, Finance and HR are now far more direct on the need for business lines to "self-fund" part of the growth prospects going forward. 

#3 – Past the hectic initial "emergency" period, confined or semi-confined times are opportune to look internally at how to improve and change. Spirits are more malleable, new ideas on how to operate better and more efficiently are easier to discuss and accept. Who would have thought that holding our firm's global Partner meeting with 220 partners on Video Conference for 5 hours to vote on business and governance items would have been possible (and successful) before this crisis? 

Considering the above, we have seen significant interest by our clients in ways to identify and realize recurring operational efficiencies. This is something that wasn't as much on the agenda in the past few years, except right after the global financial crisis. The context is different, in as much as in a growth region and given the uncertainty, our Financial Services clients (banks and insurers mostly) are keen to get prepared for every eventuality of how the economy will shape up in the next few months.

On operational efficiency improvement within Financial Services firms, our firm holds 5 beliefs that have been gathered on multiple successful large programs conducted globally and in Asia, which we apply as part of our proprietary zero-based budgeting approach.

#1—To truly unearth efficiency improvements, one has to obtain a very granular, bottom-up understanding of activities conducted within a department or a business unit, with the objective to allocate man days and dollars costs to each activity as accurately as possible – Beware of benchmark, top-down methodologies that are not so adapted (as every firm is different, and comparisons are simply irrelevant or even misleading)!

#2—No stones left unturned. Once a proper mapping of activities is obtained, focusing on "how to do things better and more efficiently" requires having all options on the table, with no "taboo" or blind areas. Factual transparency and equity in looking at improvements is of utmost importance

#3—In that line of thought, a structured approach to systematically and (constructively) challenge current ways of doing things is critical – especially at a time when technology can bring solutions that could not be imagined even a few years ago, with regards to automation and augmented decision making

#4—Once efficiencies are identified, a detailed implementation plan and efficient tracking of efficiencies is critical. Typically, that tracking should be linked with the firm's budget process.  Again, once efficiencies are unearthed, it is up to senior management to discuss, as part of the normal budget process, how they will be used (e.g., how much "self-funding" provided by efficiencies vs. new budget demands for new business initiatives)

#5—Last but not least: to go through this process, a very participative approach to elicit solutions and improvement levers is critical. Firstly, because employees and decision makers are the best sources of ideas to resolve the pain points and issues they have gone through in day-to-day operations, secondly, because improvement levers need to be fully "owned" by decision makers and budget owners to best see them implemented.

As a firm, we have gathered ample evidence on project experience that applying these 5 principles through a structured approach works best and can yield significant efficiencies (ranging from 15-20% of the addressed cost base) – We call it "Accelerated Zero Based Budgeting". Our experience is also that once going through such programs, organizations typically incorporate the acquired cost discipline in their DNA on a continuous basis, only requiring "booster shots" after a few years when processes and practices need to be refreshed again. If you are interested in knowing more on the benefits of the approach and how to go through such programs, please contact the author.