“Agenda for todayThe Objective of ZBB

The Payoff

123ZBB vs. Traditional Cost Cutting

4 Deloitte’s Approach to ZBB

5 Key Takeaways & Questions

Ed MajorsPrincipalDeloitte Consulting, LLPemajors@deloitte.com

Ron DimonManaging DirectorDeloitte Consulting, LLPrdimon@deloitte.com

Traditional Models of Expense Management

Companies have tried many approaches to budgeting and managing expenses

Budgets are developed by function, but relatively arbitrary reductions are spread across all functions to meet a budget target.

• For example, a set of final budget “adjustments” that reduce all proposed budgets by 10% or a similar amount

• Tends to encourage “sandbagging,” or artificially increasing funding requests to anticipate eventual reduction

Budget guidance allows overhead budgets to increase by some set percentage over prior year.

• Tends to “embed” a certain cost structure regardless of strategic value

• Some companies (e.g. a large fast food chain) regard this as a “leading practice” since it minimizes effort during the budget process

One-off “strategic cost reduction” program that drives significant reductions in overhead costs.

• Requires significant effort and can be traumatic to an organization

• Can reduce overall cost base but not necessarily change budgeting behavior

PERCENTAGE GROWTH “PEANUT-BUTTERED” REDUCTIONSENTERPRISE REDUCTION PROGRAM

$

Time

Annual increases on embedded cost base

$

Time

Arbitrary reduction ofrequested budgets

$

Time

Significant initial reductionbut similar trend

ZBB - Aligning funding with program efficiency and necessity rather than history

Budgets are not connected to prior year

spending

• Prevents “embedding” of existing spend in the cost base

• Allows spending levels to be set based on necessary activities of a function, rather than historical trends

• Requires more work to understand activities and cost structure

Cuts are not evenly applied across the

budget

• Eliminates common “sandbagging” practices in budgeting process

• Allows for more strategic allocation of planned spend

• Requires more work to analyze and prioritize

Budgets are tied to specific activities and

level of service

• Better aligns spending targets with required activities of a function

• Replaces “do more with less” with “do the right things with the right amount”

• Requires fairly detailed knowledge of departmental activities

Funding is targeted to activities that align

with strategy

• Allows for better alignment of expenditure with overall strategy and departmental missions

• Can reduce incidence of “we’ve always done that”

• Prioritizing activities across various functions can be challenging

Copyright © 2016 Deloitte Development LLC. All rights reserved.. Analytics & Information Management / 5

Getting it right has a payoff

Getting it right has a payoff

We looked at the last 4 years of performance data for a large retailer/department store (over $10B annual revenue) and its nearest 9 competitors.

(Total community includes Target, T.J. Maxx, Ross, Kohl’s, Bed Bath & Beyond, Nordstrom and others)

Many organizations are considering adopting a “zero-based” approach to their planning processes

TRADITIONAL COST CUTTING

ZERO BASED APPROACH

Justifying what to remove Justifying what to keep

Focusing scope on narrower set of costs or cost reduction tools

Leaving no stone unturned by examining every cost area for the broadest

set of cost reduction tools

Improving how activities should be performed (efficiency and effectiveness)

Considering both what Activities should be performed (i.e., doing less) and how they

should be performed

Created focused Initiative Planning and Execution

Developing detailed and comprehensive initiative design, planning

and execution

So it’s not an “either/or” — it may be an “and”

TRADITIONAL BUDGET PROCESS

ZERO BASED APPROACH

Zero Based Budgeting (ZBB) – A budgeting process that allocates funding based on program efficiency and necessity rather than budget history.

Based on our experience, ZBB is widely adopted in public sector and not for profit organizations. However, it is not widely used across the private sector, and if adopted is generally conducted on a select function basis.

High correlation to prior year expenditure levels

Primary organizational focus is on the cost center

Implicit assumption of “steady-state” operations

Approved spending levels are unrelated to prior year

Primary budgeting focus is on the “decision package” or specific service/activity

Explicit challenge to current service levels and

activities

We have developed an approach to zero-based budgeting that incorporates five key pillars

1. Strategic Intent

2. Operating Model / Org Design

3. Governance

4. People, Processes, and Systems

5. Performance Management

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• More strategic, with focus on future direction of the organization and immediate priorities

• Incorporates top-down targets / expectations into the process to help define priorities

• Performed on a 3 year cycle basis as strategic priorities should not change

• Looks at expense line-by-line

• Budgets are built bottom-up…rarely top-down targets

• Cycle is repeated annually

Determine business need for upcoming period

Review current costs – line by line – and assess each in terms of ability to meet business need

Communicate new budget and allocate resources

Rollup costs to determine group budget and qualitative savings

Build bottom-up budget – include only the costs necessary to meet business needs

OUR APPROACH TO ZBBTRADITIONAL ZBB APPROACH

This framework has been used to enable sustainable operational change

1. Strategic Intent

2. Operating Model / Org Design

3. Governance

4. People, Processes, and Systems

5. Performance Management

Key questions to be addressed

What is the company’s or division’s strategic intent and priorities? Who are the key stakeholders, what are their expectations, and how should capabilities be

aligned to meet them?

What operating model best aligns with the strategic intent and priorities? What is the optimal organization structure to support the operating model? What is the required cost structure?

What governance model should be established to sustain changes? How can roles, responsibilities, and accountabilities be defined within the company /

division and with key stakeholders? What are the company / division’s ideal service levels?

What processes, tools, and technologies are needed to meet core stakeholder requirements?

What core talent skill sets will be required in the future? What metrics / KPI’s can be established to measure performance and link to return on

investment? How do we benchmark against similar companies for these functions both on a cost and

effectiveness basis? What performance management approach (e.g., balanced scorecard, planning /

budgeting cycle) should be established?

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Elements of the Planning Process where we have deployed ZBB Principles

Strategic Plan Financial Plan

Capital Plan

Initiatives

Scenarios/Contingenci

es

DetailBudget

RollingForecast

Areas where Deloitte has used elements of ZBB to drive prioritization

Corporate Strategic Planning group develops strategic plan; targets allocated to major business units

Capital Plan, implementing strategies from strategic plan, identifies costs and benefits from capital projects

Business units identify major operating initiatives and develop pro forma projections of P&L impact

Based on allocated targets, business units (including G&A functional areas) develop summary-level plans using a driver-based model

Business units identify potential economic or market developments (favorable or unfavorable) and project P&L impact and contingency plans

Final business unit plans and targets are cascaded down to the rest of the organization for performance monitoring and expense control

Monthly or quarterly rolling forecast (through end of next year or a rolling 12-18 months) performed using driver-based planning model

Key Outcomes

Program Objectives

• As part of a broader organization cost-cutting initiative, reduce group budget by 25% over 3yr period;

• Reduce dedicated business support, shift toward flexible service model

• Reduce organizational layers and increase spans of control, for improved leadership development

• Retain critical talent throughout organization

Scope

• $265 M in spend, including:‒ Compensation‒ Operating Expenses‒ External Spend

• 350 employees, across more than 15 countries

Key Activities

• Established detailed cost and activity baseline

• Determined sub-functional reduction targets based on external benchmarks

• Redesigned organizational structure, function-wide and within sub-functions

• Conducted detailed external spend assessment, reduced costs through project terminations, vendor consolidation, and other areas; establish external spend governance strategy for future maintenance

~25% reduction

• $65 M in sustainable year-over-year operating cost savings identified

2012: $256 M 2015: $195 M

ZBB case study

Global Pharma Company

The ZBB pilot approach

It is important to develop a multi-phased roadmap that starts with a solid – yet flexible – pilot, which will support the short-term needs and the longer term vision

Mobilization andTraining

0

Stakeholder Input and Baseline Development

1

Future State Design and Requirements2

Roadmap / Summary of Changes3

• Establish program objectives

• Secure Stakeholder buy-in

• Establish Functional Taxonomy

• Complete Financial Planning Solution

• Data Integration Architecture• Scalable and extendable platform

• Deeper planning and analytical functionality

• Expansion beyond Finance into an enterprise wide planning solution.

• Operational Excellence• Continuous improvement in

forecast accuracy and reductions in cycle time

• Improved insights

Solution Considerations

Anaplan solution case studyLeveraging cloud architecture enables real time demand scenario analysis on market changes.

• Agility of a cloud platform to address the dynamic business environment

• Integration of top-down targets with detailed bottom-up budgets

• Real-time scenario modeling

• Self Service for all user

Causal analysis

ERP

Workday HRC

MEI – Trade Spend

GL

MM

AP

AR

Markets

Master Data

Data Svcs

Anaplan Connect

Anaplan Connect

In Memory Cloud

Data Hub Model

S&OP

Demand Planning and Optimization

Workforce Planning

Sales Forecasting

SG&A & Allocations

In Memory Cloud

Dashboards

Excel Reporting on Cloud

Other Visualizat

ion

In-Memory Models

Anaplan Reports

Data Source Data Staging Analytics Applications Reporting

Master Data Management and Data Governance

B/S & C/F

Debt/ Cash Facilities

Inventory M&A

ConsolidationsTransfer Pricing

IFRS Disclosures

Planning MethodsABC

Rolling Forecas

t

Driver Based

StatisticalForecastAllocations

ZBB

P&L - Top Line

Revenue Sales

Cost of Sales Marketing

P&L - OPEXMarketing G&A

WFP Allocations

P&L

B/S

C/F

Regulations

Start where you need smarter planning …Operation

s

Reporting&

Analysis

Top Down

Bottom Up

Strategic PlanningLong

Range Plan M&A

Revenue What-If

KPI’s Initiatives

US GAAP

“Key takeaways Ed Majors

PrincipalDeloitte Consulting, LLPemajors@deloitte.com

Ron DimonManaging DirectorDeloitte Consulting, LLPrdimon@deloitte.com

• It is critical to define the “Big Picture” upfront• Make sure you know your current planning,

budgeting & forecasting landscape• People, Processes, Technology & Data

• Identify where ZBB will have the most impact

• Enroll a key stakeholder using a financial impact business case

• Implement a pilot program to prove out the benefit

• Go/No-Go

Q A

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