Compiled by FESBC
The economic crisis and pandemic is now well past a record-breaking six months, and talk of a recession has grown louder. So, too, has the buzz about zero-based budgeting (ZBB), as Eswatini MSMEs and companies contemplate ways to free up funds to save money and shore up balance sheets.
Most regional MSMEs and companies have reaped big benefits from ZBB post COVID 19; a bottom-up approach to managing costs. But to view it strictly as a cost-control tool is to vastly underestimate its power. When used strategically, ZBB can foster top-line benefits, reconfigure cost structures, and free up investment funds. This approach, which we call growth-minded ZBB, requires a profound shift in thinking and in how a MSME or company and its people operate. At the same time, ZBB is also a catalyst for transformative change, and in that respect, it is more than just a discipline.
As with any transformation, the best time to undertake ZBB adoption is ahead of time. Rather than ponder how to survive a downturn, successful companies examine how to set themselves up to thrive regardless of the current economic environment. For those companies that haven’t yet adopted ZBB—or aren’t using it to prime growth—now’s the time, before the full economic crisis puts survival skills and preparedness to the test.
A Growth-Minded Variation of ZBB
Long-term total shareholder return (TSR) depends, above all, on growth. When MSMEs and companies respond to a (economic recession) slowdown through broad-brush cost-cutting measures, they often trigger a negative cycle of declining (profit) revenues and shrinking margins, leaving a smaller pool of capital available for investment.
ZBB rejects blanket cost-cutting. It entails meticulously scrutinizing expenditures and often resetting budgets annually to ensure the most efficient and effective use of resources. Growth-minded ZBB goes a step further: it integrates tightly with a MSME or company’s business strategy and its growth levers. Growth-minded ZBB calls for distinguishing between high-value-adding costs and low-value-adding costs. The idea is to eliminate inefficient spending and redirect it to more strategic, growth-oriented uses. In other words: “Put your money where your mouth is…”
Moreover, when applying growth-minded ZBB, MSMEs and companies start with three questions: (1) What is our top-line aspiration? (2) What investments are necessary to reach it? (3) And, how should we structure the cost base to enable those investments? This approach recognizes that it takes more than cost discipline to fund investments and opportunities that foster growth. Successful MSMEs and companies don’t regard ZBB as a one-time exercise; rather, these companies see it as a way of doing business and infuse it into everything they do.
Why ZBB Matters Now: Post COVID-19
ZBB has been commonplace among consumer products companies—its early adopters. But it has begun to spread across industries, and for good reason: it is appropriate for any industry, and it is ripe for this pandemic time. The competitive pressures and volatile conditions of the local, regional and global marketplace, combined with the ever-present threat of recession and disruption, require companies to be as lean, flexible, and adaptive as possible in order to thrive. But as the prospect of a recession grows stronger, a ZBB transformation could well be the most important way a company strengthens itself, both defensively and offensively.
ZBB supports the ability to strategically target cost reduction while freeing up funds for growth. Because expenditures are classified according to their type, rather than their point of origin, ZBB brings once-hidden costs to the surface. This added transparency, together with clear cost accountability and cost-management methods, facilitates and encourages the much-needed discipline that helps our local MSMEs and companies better identify high- and low-value costs and make conscious, strategic decisions. For bigger MSMEs and multi-national companies, this transparency enables de-averaging, which is particularly important during such downturns. Applying a universal cost-reduction policy or cookie-cutter approach to operations across markets and regions with different conditions and opportunities makes little sense during downturns.
Furthermore, in addition to securing efficiency in the cost base, ZBB also simplifies and creates organizational efficiencies. Cost reduction is essentially the strategic enabler: but you should equally remove gaps to fund opportunity and flexibility.
FESBC observation in an ongoing survey shows that Pre-emptive Transformation: Fix It Before It Breaks of any kind generally yields a greater payoff, because it boosts a company’s capacity to grow instead of merely survive. FESBC also found that companies that implement change pre-emptively generated significantly higher long-term value than those that responded reactively. In the three years after a transformation began, the preemptive transformers achieved an annualized TSR that was 3 percentage points higher than the annualized TSR of reactive transformers. Furthermore, the preemption (profit) premium has long-lasting effects: the earlier a company transforms, the better its future performance. In fact, that is the most important observable success factor in corporate transformation.
Additionally, acting preemptively delivers other benefits as well: the transformation can be executed faster and for less cost. Those two benefits combine to produce a return on investment that is about 50% higher than the ROI of a reactive transformation.
The High Cost of Reactiveness
The value of restructuring the cost base proactively is, as with other types of transformation, especially striking when we consider the fate of companies that wait to act. In the period leading up to the global financial crisis that started in 2007, companies continually absorbed higher costs as long as those costs helped deliver necessary volumes. When the financial crisis struck and volumes plummeted, those companies had to reduce their absolute cost base in order to preserve the bottom line as much as possible. Most companies were caught off guard; although the signs of a slowdown did not escape them, they had underestimated the severity of the prospective downturn and its potential impact and waited to act. For most, their actions amounted to too little, too late.
Additionally, an extensive FESBC survey conducted during the initial months of the pandemic found that even as events unfolded, some companies remained surprisingly complacent, neglecting to create contingency plans in the event of a deepening and prolonged pandemic. At the time, the South African CEO of a large industrial Eswatini MSME company observed,
“Managers look at their balance sheet and cash reserves and think they are safe. But they are very surprised by how little time they have once demand drops like a rock.”
The delayed response of many SADC companies cost them in another painful way: they had to use savings culled from their emergency austerity efforts to shore up their balance sheets to protect access to financing. Thus, their savings assisted only in the short-term and could not help improve their long-term positions as the pandemic approach a year.
To stay primed for growth, companies must maintain strategic momentum, regardless of present market conditions. They must keep up marketing support, carry out internal improvements, seize M&A opportunities, and pursue innovation. An upside is that such activities are generally cheaper in such economic downturns and out of the reach of cash-strapped competitors.
A Change in Thinking, Ways of Working, and Culture
Because ZBB is as much a mindset as it is a way of working, it can only take hold with a broader cultural change that creates the right organizational context. (See the sidebar “Shaping a Growth-Oriented ZBB Culture.”) Cultural change must start at the top. The CEO and CFO must be actively involved not only to determine why ZBB should be adopted but also to articulate how they see its contribution to the company’s long-term growth. The CEO and CFO must also design the most appropriate ZBB program. They, along with other leaders, will need to refocus the team’s energies, recognizing that ZBB is a long-term journey and that the team needs to embrace the new culture of cost ownership. Leaders must model the desired behaviors, demonstrating how to communicate, set priorities, and interact with others. Leaders can also agree up front on how to reinvest savings for growth and communicate that commitment to the larger organization.
Eswatini MSMEs and companies can shape the organizational context in many ways, such as by linking desired behaviours to performance appraisal, management incentives, training and engaging people, communicating the what and the why, and putting in place the right tools. Efficiencies are the aim. The point is not only to eliminate waste but also to streamline processes and structures—and avoid adding new ones.
For all these reasons, change management is essential to make ZBB stick. At the macro level, Eswatini MSMEs and companies need to establish the rationale and messaging, identify those most affected and create a plan for involving them, and support the development of all the levers that will help shape the right organizational context. At the micro level, companies need to help frame the messaging for each initiative in a positive, actionable light (“go paperless and digitalized,” for example, instead of “no more printing”).
ZBB, when adopted in the right spirit, can do much more than inject cost discipline—it can help companies maintain their strategic momentum, regardless of economic conditions. History shows that freeing up resources to invest for growth is particularly important during a downturn. It gives companies a significant edge over competitors, many of whom will find themselves struggling to survive. And that edge can have staying power: companies that perform well during a downturn enjoy a performance premium long after recovery sets in.
Because it is not a one-shot effort, ZBB adoption calls for a new mentality and a new culture—which take time to instil. By taking action now, companies can be nimble, strong, and ready for anything when the inevitable happens.