Back to zero: Companies use 1970s budget tool to cut costs as they hunt for growth

Mon Jan 30, 2017 4:17am EST
 
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By Tim McLaughlin

BOSTON (Reuters) - The number of U.S. companies using a budgeting tool made famous in the 1970s by former U.S. President Jimmy Carter is surging as they turn their spending habits upside down to boost profits and to re-invest in their businesses.

The upswing in zero-based budgeting (ZBB) signals that a broader cross-section of U.S. companies anticipate turbulence in their revenue growth. They face more pressure on profits, too, as wages and interest rates increase, and a stronger dollar makes their products more expensive overseas.

In consumer staples, where sales growth is often capped in the low-to-mid single digits, Campbell Soup Co CPB.N, Kellogg Co K.N, and Oreo cookie maker Mondelez International Ltd MDLZ.O have already rolled out ZBB programs that promise billions of dollars in savings.

Other industries, including finance, energy and manufacturing, are now following suit. Use of ZBB in 2017 is expected to increase dramatically in the United States and around the globe, according to consulting experts. Bain & Company reported last year in a survey of 406 North American companies that 38 percent of that group would use ZBB, up from just 10 percent in 2014.

"ZBB has taken on a life of its own," said Greg Portell, a partner at consulting firm A.T. Kearney.

A ZBB approach requires corporate managers to justify each line item of spending in their budgets, or even build their budgets from scratch. That is a departure from the typical process of using the previous year's budget as a starting point and adjusting it based on revenue and inflation projections, for example.

It often cracks down on the size of a company's real estate footprint, corporate travel, terms of international assignments, redundant technology and outside consultants. Employees get cut, too.

But there are risks. One is that companies focus too keenly on restraining spending and not on reinvestment that promotes new products and revenue growth.   Continued...

 
The logo of Mondelez International is pictured at the company's building in Zurich November 14, 2012. T REUTERS/Michael Buholzer