Tolulope Martin gives three reasons why you should think of applying a zero-based approach to your engineering budgets
CASH, critical for businesses in the best of times, has never been as important as it is today as the world battles Covid-19 and its devastating effects on the economy.
As any leader actively managing a budget will tell you, the process of ensuring that the allocation of resources is robust and continues to support long-term business objectives can be complex and time consuming. Particularly with engineering-related operating expenses in a rapidly changing regulatory environment, it is important to have a good method of ensuring that year on year, the allocated budget continues to address the right legal and strategic elements of your business.
Zero-based budgeting is arguably one of the most useful tools for carrying out a thorough review of budgets.
Zero-based budgeting was pioneered by Peter Pyrrh and first introduced by Harvard Business Review in an article in 1970. In its original form, it was a method supposed to make organisations forget about last year’s spend and focus on future spend by resetting the budget to zero and creating a budget plan only based on current needs.
Zero-based budgeting is not an easy exercise, particularly when carried out for the first time. It requires taking apart budget positions that might have been unchanged for many years, and working to understand what is the rationale behind them, before allowing them back into the budget.
In January 2019, my team at Shell embarked on a zero-based budgeting exercise on a significant part of the engineering budget that I was responsible for at the time. There had been a degree of discontent about the level of transparency on the justification of certain expenses, and the team had given some thought to methods of ensuring that unjustified cost creep was not occurring. It was around this time that I was introduced to zero-based budgeting by a colleague.
The idea that we could do a budget reset and review, and ensure that each expense line was properly allocated and justified was exciting, if initially daunting. This was the first time zero-based budgeting was being carried out on that particular budget bucket and the exercise was triggered by a desire for more transparency into certain cost buckets; for example, could every expense labelled as a cost to meet a legal requirement be linked to an actual legal requirement? We wanted to be certain that our budget was being spent exactly where it was meant to be spent.
We were very impressed by what we found. Over a three-month period, after taking apart our spend into various buckets and reviewing the justification for each element before allowing it back on the table, we identified significant amount of spend which could immediately be eliminated from certain spend buckets, for example we were able to streamline and consolidate inspection activities which had previously been duplicated in different intervals by two different teams, and the freed up spend shifted to more pertinent areas, without any safety or operational risks at all. We also identified several opportunities for further wins by improving certain parts of our operational model.
The results were fantastic, and it goes without saying that zero-based budgeting has come to stay as a very useful tool in our toolbox going forward. As I read more and found out more about zero-based budgeting, I couldn’t help but wonder, why isn’t it carried out more often on operational expenses, particularly in the engineering space?
In a 24/7 world and for larger businesses, resetting your budget to zero on an annual basis and starting from scratch is not always realistically manageable. However, modifying the method slightly to match business reality and needs can transform it into an immensely valuable business tool.
Apart from the fact that zero-based budgeting can drive savings, which is of course always a satisfactory outcome for cost management, there are at least three other core reasons why zero-based budgeting should become a regularly-used tool in every manager’s toolbox.
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