Pros and cons of zero-based budgeting for marketing dollars

In January this year, Unilever CEO Paul Polman announced the company would roll out zero-based budgeting globally – a move it had tested in Thailand last year, which cut down the spending by two percentage points as a share of sales. Polman was reported as saying:We are further strengthening our innovation funnel while shortening innovation cycle times, stepping up our digital capabilities and rolling out a global zero-based budgeting programme.It would be a mistake to see this purely as a cost-cutting or budget reduction move. Yes it assures a certain level of efficiency, but it is really just another approach to budgeting. A bigger reality is that a whopping majority of companies do not follow it; a handful of those who do include among others Kraft Heinz, Mondelez, P&G and now Unilever.There are views for and against zero-based budgeting. In this article we take a look at what it actually means for marketing and what the industry thinks about it.Zero-based budgeting and traditional budgeting are almost the polar opposite approaches. The former requires the building (and justification) of the annual budget from the bottom up – starting with no predetermined budget amount – while the latter assumes the budget from the previous year is a given and the final budget is justified on the variances (up or down) from the prior year’s budget and is usually based on an extrapolation of its revenue/sales projections.In zero-based budgeting, first you forget about the total spend and where that spend was allocated last year – hence, the zero. Second, the marketing team does its research, constructs its marketing plan and concludes it with a budget in which it asks for a certain amount of investment and promises a specific return for that investment.Senior management then reviews the plan and either grants the amount or pushes back and asks the team to make changes. According to Paul Davies, managing partner of Asia Pacifi c for Roth Observatory International, the zero-based budgeting approach is a better way to budget as long as the organisation has the time to undertake it, can support the effort required and/or generate or have access to the research/data needed.However, a mix of both may work well for some companies, that is, they undertake a zero-based budget every few years and in between use a more traditional approach. Davies, collates a list of pros and cons of zero-based budgeting:ProsEfficient allocation of resources as it’s based on needs, requirements and benefits rather than history.Drives managers to find cost-effective or innovative ways to improve operations.Detects inflated budgets.Increases staff motivation by providing greater initiative and responsibility in decision-making.Increases communication, collaboration and co-ordination within the organisation.Identifies and eliminates wasteful and obsolete operations.Identifies opportunities for outsourcing.Forces cost centres to identify their mission and their relationship to overall goals.Facilitates a more effective delegation of authority.Zero-based budgeting helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action. ConsMore time consuming than incremental budgeting.Justifying every line item can be problematic for departments with intangible outputs.Requires specific training due to increased complexity versus incremental budgeting.In a large organisation, the amount of information backing up the budgeting process may be overwhelming.We asked what some of the brands in Singapore are doing. Local bank OCBC operates on a hybrid model. The marketing team at OCBC supports the business on many fronts and one of the most important is the day-to-day marketing operations for its branches, ATMs and service communications.Budgeting for these day-to-day activities is very much based on expected volume in relation to its customer base and the activities that drive them to the various touch-points. For these, budgeting is more effi cient from historical baselines.Zero-based budgeting is used for strategic initiatives and major campaigns which start from the strategic intent of the campaign, the target customers and the design of the campaign activities.“There needs to be a robust process to allow flexibility in the redeployment of budgets if certain activities show good returns to expenses. This could be a potential shortfall of zero-based budgeting, but it frees up planning from budget boundaries and could lead to great ideation and campaigns. This can be overcome if a portion of the budget is flexible and redeployment is a priority,” says Goh Theng Kiat, chief marketing officer at OCBC Bank.However, a possible pitfall could be the suboptimal execution of successful campaigns if they are under budgeted. If the marketing team encounters rigid budgeting perimeters and slow movement of marketing funds to continue supporting a successful campaign, the campaign could be under-funded, resulting in its effectiveness not being fully maximised.“Marketing teams using a zero-based budgeting approach need to put in place fl exible planning processes to nimbly redeploy resources and have a good understanding of business priorities to allocate resources to optimise their marketing budgets,” he says.Zero-based budgeting could also lead to short-term thinking for quick results, while compromising longer term strategic investments.In Rod Strother’s experience, back in the days he was at Lenovo, his team was asked one year to work with “no restrictions” on the budget. At the end of the day, it spent a lot of time putting it all together, and were ultimately given a number to work with. Strother is now VP of digital transformation at StarHub.“Might sound like a waste of time, but it puts us in a great position to say what was low/medium/high impact versus the business objectives and therefore, we knew what should be included in the budget. We also used it when we were faced with budget cuts during the year,” he says.But the onus is on marketers to plan together and then sell the plan. “If they’re simply going to the agency and asking them to do the ZBB then they’re fairly ineffective as a marketer – which tells the leadership something about their people,” he says.“There is a caveat to this though.You do need some parameters – previous spend for instance – otherwise you’ve got absolutely no limitations on what you propose. But as long as you can justify what your ROI is going to be from the investment then perhaps parameters is not something that applies.”Implications for marketing/ad agenciesA number of agencies have used and perhaps are still using this approach for their own budgeting. From the perspective of clients using it, the challenge to an agency is that it creates more uncertainty as they are not (or only partially) involved in the budgeting process and so any changes can be a complete surprise.“They will also have less visibility on the scope of work (and thus resourcing needs) and it can make fee negotiations very tight. If the new plans mean a restructuring of their teams/resource level this can be very difficult to conclude,” Davies says.Conversely, if the client involves the agency in the process, they may think the first proposal for the budget/scope they develop is what they are going to get – so they try and resource and start thinking about activity at that level.“Agencies generally don’t seem to grasp the concept of an iterative budget process,” he added.