Corporate Finance

The Zero-Based Mindset

Starting from a “zero base” can reshape the customer portfolio, realign the organization, and unearth value in the supply chain.
Chris Roark and Kris TimmermansSeptember 18, 2019
The Zero-Based Mindset

Successfully balancing between increasingly evasive sales growth and earnings performance in the modern business environment would seem to require a finance chief with a magical touch.

With evolving demands from stakeholders come evolving business strategies designed to respond to them. In finance, that means traditional cost management practices like zero-based budgeting (ZBB) are no longer enough. We’re in the age where companies need to embrace a holistic zero-based mindset, what we call ZBx. This mindset is underpinned by automation and digital tools and is designed to radically shift cost curves and reallocate the critical resources needed to fuel a business strategy. ZBx also creates a culture of innovation, allowing companies to achieve start‑up speed at enterprise scale.

Increasingly, companies are adopting a zero-​based mindset in response to market demands for corporate strategies centered around sustainable growth. Solving for the “x” in ZBx requires a four-pronged approach through a zero-based lens—zero-​based organization, zero-​based commercial, zero-​based supply chain, and zero-based spend.

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Organizational Realignment

Zero-based organization (ZBO) lets companies design the organization from a clean sheet, shifting talent toward work that contributes to the distinctive capabilities, operating model, and outcomes needed to fuel growth.

ZBO challenges a company’s strategic ambition, choices, and distinctive capabilities without the biases of the past. Think of it as kicking the tires on what a company will and will not do, as well as what it will do differently. Staying relevant means developing a growth strategy and quickly realigning to a more agile organization to support it.

However, serious soul-searching is a prerequisite for ZBO approaches. Companies must question what is happening in their company and use it to feed the clean-sheet design that informs a future operating model — at either the enterprise or functional level. The right people doing the right work is critical to fuel profitable growth. Yet, talent is a fluid ecosystem of fixed and variable human labor, bots, virtual and cognitive agents, and customers and suppliers. ZBO designs for this boundaryless ecosystem.

With ZBO, companies work simultaneously on two fronts to drive competitive advantage and growth: One, they focus on “getting brilliant at the basics” with process excellence and more efficient execution of core functions. And two, they are always “cutting new ground” to drive innovation, build distinctive capabilities, and engage customers in wholly new ways.

Customer Economics

Companies that can identify their most strategic and profitable products, services, channels, and customers have created the foundation to crack the code on zero-based commercial (ZBC).

ZBC centers around building competitive and economic models that allow for segmentation and prioritization of investment across the business. By starting with a clean-sheet view of investments in marketing and innovation, finance and business leaders can calibrate where both over- and under-investment is occurring.

But the insight and optimization do not stop there. This view also allows for better alignment of sales force coverage, customer service, and billing and shipping costs, among other go-to-market priorities.

Executives are often surprised to find the degree to which highly unprofitable customers can drag down an entire company’s economics and distract from strategic priorities. Insights like these can help reshape the customer portfolio to improve profitability and rebalance customer experiences to align with value.

Today’s customer journey is more complicated than ever, so traditional analysis of customers, channels, and product mix may no longer provide the same insights as they did in the past. Achieving game‑changing results from ZBC requires the strategic fundamentals of “where to play” and “how to win” to be addressed with rigor and granularity.

Supply Chain Levers

The supply chain holds more value than most companies realize. With half of a company’s costs in the supply chain or costs of goods sold, many companies fail to build a clear picture of who’s spending what and where.

To accelerate change and identify all unnecessary costs, zero-based supply chain (ZBSC) uses three levers: price, performance, and value engineering, focusing on long-​term sustainable cost reductions. These initiatives cover every aspect of the supply chain, from turning by‑products into a source of extra revenue, through reducing the number of finished goods damaged in handling and transportation, all the way to analyzing the physical footprint of plants and distribution centers to identify consolidation opportunities.

For example, one global products company, which was under continual cost pressure, adopted a zero-based supply chain approach to reset its baseline yearly. The company expanded existing zero‑based principles to cost of goods sold, with an initial focus on logistics.

By applying advanced analytics and technology across the supply chain—including automation for picking and packing and warehousing, and predictive analytics for optimizing movement and modes of raw materials and finished product—the company was able to reset targets. As a result, a more than 20% cost reduction was identified and 12% captured in the first 12 months.

Visibility Into Spend

Zero-based spend (ZBS) focuses on general and administrative (G&A) costs to an unprecedented level of granularity. As businesses rapidly expand and shift, they run the risk of G&A costs rising faster than sales. Taking a zero-based approach to spend helps companies identify G&A costs across the organization to free up non-working money for other growth initiatives.

However, companies must be careful about treating the task too lightly. Slashing administrative budgets that adversely impact culture or effectiveness can lead to inefficiencies. There is a need to understand what drives value versus what does not. By gaining true visibility into a company’s entire G&A spend, CFOs can help determine where consolidations, eliminations, and vendor adjustments can be made to reallocate funds to revenue-generating activities, such as digital transformation, new market entries, or joint ventures and acquisitions.

The momentum around ZBx today mirrors the early years of digital transformation. First movers ignored the skeptics and went “all‑in” on digital. Today, digital has become non-​negotiable for survival. Soon, we believe the same will be said for ZBx.

Kris Timmermans is a senior managing director and Chris Roark is a managing director for Accenture Strategy. They are co-authors of “The Big Zero,” from which this article is adapted.