Why Agencies Should Embrace Zero-Based Budgeting

Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Greg Paull, founder and principal at R3 Worldwide.

Zero-based budgeting is one of the most radical approaches to cost-reduction, yet it has become the go-to model for big-name companies like Coca-Cola, Kellogg’s, The Kraft Heinz Co., Mondelez International and Campbell Soup Co.

It has been described as both logical and extreme –logical for its systematic analysis and reasoning, and extreme because it wipes the page clean and starts budgets from zero every financial year, forcing departments to justify costs and demonstrate real value.

Zero-based budgeting has been a topic of scorn from agencies of late, particularly since Martin Sorrell cited the budgeting method as a key driver of WPP’s less-than-stellar performance in 2017. However, zero-based budgeting doesn’t have to be all bad for agencies. In fact, it can act as a catalyst for agencies to be more invested in the business results of their clients.

I don’t think anyone would argue that eliminating inefficiencies is a bad thing for marketers and their agencies. While it can be difficult to measure the effectiveness of creative work, no agency wants to spend the time and money to create a piece of work that is not affecting their client’s business results – it would be a waste for both parties.

A common misconception surrounding zero-based budgeting is that the zero indicates that budgets will definitely be cut. It might be the case that while brands are evaluating what drives value for their business that they decide to increase the budget dedicated to agency partners. Agencies should view the zero-based budgeting trend as a reason to invest more in measurement and become even more effective partners for their clients.

Brands are seeing results

Global legacy organizations have largely experienced negative growth in the past several years, losing market share to more nimble, local competitors. For them, the benefits of zero-based budgeting are best illustrated in results.

In its second year of zero-based budgeting, Diageo increased its savings goals to 700 million pounds ($982.4 million) from 500 million pounds ($701.7 million). Unilever has reported higher profit margins and is ahead of its target savings of 6 billion euros by 2020. While other factors likely contributed to these results, these numbers are just the type of results-driven provocation that makes zero-based budgeting worthy of exploration, but that doesn’t mean there aren’t some pitfalls.

Zero-based budgeting is anything but foolproof. It requires a mindset committed to transparency, governance and ownership and cost centers to shift their attention to what delivers the most value instead of how much will be allocated, and it demands accuracy and precision. Without efficient organizationwide implementation, what companies risk with zero-based budgeting is a lot of work for minimal return.

Agencies should get on board

A successful zero-based budgeting approach comes down to measurement. Investing in a measurement framework to track what’s working and what’s not will benefit both the marketers that are turning toward zero-based budgeting and the agencies they partner with.

How a marketing budget is structured should go hand in hand with the way agencies are paid. If a value-based remuneration model is in place, where agency fees are dependent on business results, it becomes much easier for the agency to prove its value and reduce its risk of being cut from the marketing budget.

The more commonly used labor-based remuneration model for most client-agency relationships presents problems for both parties. Much like a taxi fare, the client has to pay whether or not the agency adds any value. If a company shifts to a zero-based budgeting approach, looking to invest only in what creates value to the business, it would make sense that it would compensate its agencies based on the value they add rather than just the number of hours spent on a project.

Benefits beyond budget

There are benefits of zero-based budgeting that expand beyond just the budget for clients and agencies. The endgame for zero-based budgeting and value-based remuneration are the same: spending marketing dollars effectively and efficiently. Marketers can mitigate cost redundancies while freeing up that money to invest in upstream innovation projects, which is crucial in the constantly shifting digital ecosystem and agency relationships models.

Organizations need to regard zero-based budgeting as part of a wider efficiency program if they are to reap long-term benefits. An example of this holistic approach is demonstrated by the Coca-Cola Co., which announced in 2014 that it would adopt zero-based budgeting as one of four key initiatives to reinvigorate growth and restore the company's long-term growth targets. This “productivity program” included restructuring of its supply chain, streamlining the company's operating model and driving efficiency in direct marketing investments.

Without this wider approach, zero-based budgeting can be narrow in scope. In complex global businesses, each function does not operate in isolation. When developing budgets, strategizing across silos to consider how each area of the business will be affected is paramount. If overlapping functions are integrated for efficiency, this can result in significantly less savings.

Moving forward together

A successful client-agency relationship must be a true partnership, with both sides invested in each other’s success. For organizations looking to implement zero-based budgeting, it is important to bring agency partners into the process and make spend levels and efficiency two of the key components of the negotiation process, rather than an afterthought.

While most companies can benefit from certain aspects of zero-based budgeting, there is no one-size-fits-all approach. What is important is that they should be clear on their intent and levels of commitment before they start.

Follow R3 (@R3WW) and AdExchanger (@adexchanger) on Twitter.

 

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