Your Zero-Based Transformation Right Now

ZBT can do much more than just instill cost discipline; it may also assist businesses in maintaining their strategic momentum even in adverse economic times.

The average longevity of a public firm is decreasing. Today, one in every three companies will cease to exist in their present form over the next five years. They were one in twenty-fifty years ago. Our turnaround management consulting services assist businesses in avoiding a premature departures by guiding them through a company turnaround.

Companies dealing with a strategic crisis are under huge strain and suffer massive disruption. If companies ignore warning indicators like as losing profitability or market share, the strategic crisis may turn into a profit crisis, with dropping earnings and stagnant or falling sales, forcing them to deplete financial reserves.

Only a business turnaround can save a firm from entering the next stage of decline: a liquidity crisis.

Our Most Recent Thoughts on Business Transformation

To get the most out of their business transformation efforts, executives must first understand what drives transformation success—and what stymies large-scale change. Explore our most recent insights into the secrets of corporate transformation and learn how to improve your chances of making a significant difference.

Important Takeaways

As a firm develops, CEOs and other top executives often fail to prioritize projects. There are several causes for this, but the end consequence is the same: multiple initiatives with overlapping or even competing aims, and resources that are stretched too thin for programs to succeed. Senior leaders may improve their capabilities in three ways:

Make prioritization an intentional activity that is linked to the company’s strategy. The important question to constantly ask is: Does the initiative aid in the execution of the business plan or get the firm closer to its objectives?

Using the T-shirt-sizing method, establish priorities. Make it easier to choose projects by analyzing essential data in broad, straightforward categories.

Put the strategy into action. When priorities are established, the analysis must come to a halt and action must commence.

Senior executives should take the lead not only by enhancing their abilities but also by serving as role models for prioritizing so that the organization may accomplish its objectives.

It is often said that to lead is to choose. However, we often find that CEOs and other senior executives want assistance in choosing the actions that would help a firm adapt.

A big store, for example, sought to alter its cost base. We observed that due to inadequate prioritizing, more than 100 activities were running concurrently. The majority of initiatives were too tiny to make a significant influence. Others existed just on a spreadsheet, with no resources given.

A failure to prioritize is an organizational failure. Senior leaders must understand this and take the initiative to support an organizational-wide response to change. Then, they must guarantee that all managers, beginning with themselves, become effective decision-makers.

Why Is Prioritizing Difficult?

Prioritizing transformation efforts necessitates CEOs and top executives determining what must be done to meet the company’s objectives when it must be done, and, as importantly, what must not be done. The majority of executives who struggle to prioritize projects for their organization confront one or more of the eight obstacles listed below.

Wanting to do everything. A proclivity towards activity is desirable, yet certain corporate cultures promote excessive action. The prevalent belief is that doing more will hasten change. As a consequence, when faced with a list of projects, some executives struggle to make a decision because they want to undertake them all. In fact, though, neglecting to prioritize often grinds progress to a halt.

Failure to prioritize often grinds change to a halt.

Weeding out projects that are incompatible or overlap. Various efforts that are now ongoing are often in conflict with one another or duplicated. Executives struggle to prioritize efforts since they are unable to identify such projects. Unfortunately, failing to make decisions may lead to a vicious spiral of complexity. As initiatives multiply, it becomes more difficult to identify those that clash or overlap.

Operating with a Silo Mindset. Some senior executives optimize their judgments for their own function rather than working with their peers throughout the business. This error not only makes it difficult to prioritize efforts for the whole organization, but it also results in inefficient solutions since it fails to account for knock-on or second-order impacts.

Making a job too difficult. Some businesses need very detailed data regarding the predicted effects of projects throughout the transformation planning stage. This restriction may impede CEOs’ ability to rapidly discard initiatives that are insignificant.

Feeling Under Pressure to Follow This Year’s Trend. Every industry has a popular trend. The temptation to follow the newest trend might impair executives’ ability to properly analyze initiatives and choose those that meet corporate objectives or contribute to the achievement of strategic goals.

The urge to follow the newest trend might impair executives’ ability to choose initiatives that meet corporate goals.

Having a strong desire to pursue previous trends. What about initiatives that were popular in prior years? Some top executives find it difficult to cancel initiatives due to sunk expenses, even though the initial reason has changed and the project would no longer have the intended effect.

Ignoring the Fundamentals. Some top executives undertake next-level initiatives without first completing the fundamentals. A firm, for example, may automate or digitize an unproductive or wasteful process. It’s like attempting to construct a castle out of the sand.

Ignoring the Loudest Voice. Seasoned managers sometimes attempt to save their favorite projects long after they should have been discontinued in order to free up resources for more viable efforts. Given these managers’ extended tenure, top executives sometimes give their opinions disproportionate weight, rather than considering the organization’s strategic objectives.

The More Serious Issue

The capacity to prioritize, like any other talent, increases with practice. Unfortunately, in some firms, that expertise has been underutilized in recent years. Pandemic-related efforts were prioritized above everything else, and long-term objectives were placed on hold.

However, in the face of rapid digitalization and the demands of the global economic slump, many businesses are focused on transformation. They are developing huge, cross-functional initiatives to produce value, such as programs to enhance the customer experience, make procedures more efficient, or even rethink the company model. However, in the absence of appropriate prioritizing, businesses often create bottlenecks and fail to concentrate personnel on the most critical initiatives. The most vital efforts may be stalled consequently.

The ability to prioritize is critical to the success of transformation programs. It improves the chances that a firm will make the required adjustments and produce value. Senior leaders may significantly improve their talents in three ways.

Make prioritization an intentional activity that is linked to the company’s strategy. In times of substantial upheaval, it’s tempting to build a list of all projects and start working on them. However, executives should include a prioritization stage into the transformation process from the start—a period in which they deliberately review and choose initiatives. The fundamental question that must be posed during the prioritizing step is: Does the initiative aid in the execution of the business plan or get the firm closer to its objectives? Executives often fail to devote resources to key activities in the absence of a prioritization step, leading the transformation to stall.

Using the T-shirt-sizing method, establish priorities. Casual apparel, such as T-shirts, is offered in small, medium, and large sizes to make it easier for shoppers to choose. Apply the same logic to prioritization. Make it easier to choose projects by analyzing essential data and indicators in broad, straightforward categories such as financial effect, time to value, and complexity. This method gives the accuracy required to swiftly screen out initiatives that do not match the company’s objectives. Making judgments on the remaining projects will be more complicated. Executives should compare the cost of a project to its effect, or the cost of a project to its time to value.

Put the strategy into action. When the priorities are apparent, the analysis comes to a halt, a strategy is developed, and it is time to act. Discipline and genuine leadership are essential; the company must live up to the new objectives. Senior executives who routinely make difficult but important decisions provide a good example for other managers.

Prioritization is difficult for many CEOs and senior executives. It also seems contradictory that they may produce greater value by focusing on fewer efforts. However, effective transformations rely on all managers’ abilities to define priorities, manage restricted resources, and provide clear direction to their organizations. Senior executives should thus take the lead, not only by enhancing their skills, but also by serving as role models for prioritizing so that the organization may accomplish its objectives.

It may seem contradictory, but during times of economic uncertainty, businesses should explore the potential of change to increase their skills and performance.

Coming out of a worldwide epidemic and into a moment of resurgent inflation and economic instability seems to be an opportune time to embark on a big change program such as a transformation. What are your thoughts?

I would argue the inverse. We all know that during a downturn, the gap between winners and losers widens. And, given the rate of change we are seeing today, that difference is growing exponentially in comparison to what it would have been 10 or 15 years ago. So hunkering down is out of the question. Even if you do not undertake a complete makeover, attempt to discover areas where you may continue to progress. Can we make a cost reduction? Or maybe operations? If you don’t, history suggests that you’ll fall farther behind organizations that are better positioned to accelerate.

You should also think about what a shift can accomplish for you. First and foremost, be organized. A transformation provides a single method of working, a single language, and a set of norms by which the whole organization operates. You may create a strategy that you can go to every week to see exactly what is going on across the firm. You develop the flexibility to pivot if something unexpected occurs or if something goes behind. Many people associate this with bureaucracy or “admin,” but the fact is that you are embracing tremendous processes, building muscles of consistency and discipline that will eventually produce capacity in an organization. Decisions are made quicker, and work is finished more quickly, when teams and people learn to speak the same language, have anticipated clarity on tempo and governance, and have visibility to leadership.

Second, it assists teams in dealing with ambiguity. I know what I’m going to do this week, and I know what I’m going to do next week. This helps to maintain interest and motivation during a period when individuals are tired.

Third, improve your skills. People tend to think more critically and challenge their method of working when they work with a transformation office that is continuously challenging how work is done. You’re teaching children to be more resilient, to cope with setbacks, and find out how to progress or solve an issue. These abilities benefit people as individuals and teams in unpredictable times, as well as provide necessary capabilities for leaders and managers.

How can you know whether the transition is effective?

When a transformation is done correctly, the pyramid is flipped. The employees who perform the job are the ones who get promoted. Leadership is working for them, asking questions such as, “What do you need to move your project forward?” and “What roadblocks do you have?” You are increasing organizational agency, which boosts culture and engagement ratings.

In one business we worked with, the senior leaders brought a paper with two questions to each transformation office meeting. “What decisions can I make today that will enable your work to move forward?” it asked. and “What actions do you require from me to alleviate any difficulties you are experiencing?” After a few weeks, teams started to make judgments and propose actions to the leaders. Live decisions were made and recorded. Progress on the leaders’ action list was discussed with the group at the following sessions. The outcomes of the transformation demonstrated a 25% over-delivery on financial objectives, as well as enhanced engagement ratings, notably on the dimensions of confidence in leadership and workers believing their leadership cared and empowered them.

People tend to think more critically and challenge their method of working when they work with a transformation office that is continuously challenging how work is done.

When businesses establish the proper climate for change and invest time assisting the doers, financial benefits follow—as well as improvements in culture, employee engagement, and upskilling.

What about the firms that began transforming under one set of conditions and then the world changed?

Each circumstance is unique, but a reset is almost certainly necessary. If the transformation isn’t delivering or isn’t reaching the intended momentum, the first step is to determine what needs to change. What needs to happen faster? Are the proper workstreams in place? Determine where you are in the transition and what the best sequencing is. Examine the procedures and governance to determine their effectiveness. Do they adhere to best practices? What steps did we take to engage the company and its teams?

This is where starting a new year comes in handy, but changes in the operational environment (such as increasing inflation) or even milestones in the organization’s life cycle (such as investor conferences) may also assist. Gather the group and explain, “We’ve done great work, we’ve made progress, but given the environment we’re now in, we’re going to have to change how we’re doing our transformation.” Highlight the victories and be open about where leadership went wrong. This will result in more buy-in for more severe transformation. Make this a huge deal for folks so they feel like something is changing. If you don’t, you won’t receive the behavioral change you need to take the transformation ahead at the necessary speed.

What are the major challenges that businesses encounter while implementing a successful transformation?

The current amount of uncertainty in the macro-environment, combined with the needed rate of change, makes driving change more challenging. The labor itself is more difficult. Companies led many of their reforms inside verticals or departments (such as operations, IT, or finance) 10 or 15 years ago. However, in today’s world of matrix organizations, customer-centric methods, and digitalization, the task increasingly relies on a large number of employees throughout the firm. Many executives lack expertise with this operational model, and organizational structures are often structured on conventional patterns, with teams paid based on what they directly lead. It is critical to examine the cross-functional nature of the job and invest in creating structure and teams to do it, as well as educating and rewarding people to support this new paradigm.

There are also a lot more expectations on a company nowadays. With rising investor pressure to act quickly and produce larger returns, boards are not ready to wait for five- or ten-year reforms. Our customers are under a lot more pressure to move quickly. Add to that the velocity of technological progress and the social cultural dynamic of being less patient than we used to be, and you have a high-pressure and high-drive workplace.

We’ve also hit the greatest degree of reported burnout in history. “We are burnt out,” say 40% of people worldwide. So you have the added difficulty of individuals who need to complete the task having significant change fatigue over the previous three years.

These are significant issues. How are they to be overcome?

It may be difficult: according to our study, only roughly 30% of transitions achieve their objectives. Success is often determined by leadership commitment, a focus on culture, and, of course, executional perfection.

Good leaders establish transformation objectives and targets, shift toward data-driven decision making, and disclose progress on a regular basis. They are especially concerned with controlling the transformation’s effect on personnel and increasing their involvement. They commit to implementing the change and changing their own conduct as role models.

Success is often determined by leadership commitment, a focus on culture, and, of course, executional perfection.

Concentrate on culture. The evidence is clear: if you do not concentrate on enhancing the culture, altering the methods of working, and deliberately disrupting organizational practices that do not support the company’s future, the achievements you obtain will be short-lived. Employees become more engaged and driven when a change is focused on enhancing the organization rather than merely producing financial benefit.

Creating a transformation office and naming a chief transformation officer are crucial for implementation, particularly in the current context. A competent transformation office’s rigor in carrying out its tasks may provide a tremendous incentive for new behaviors. Chief transformation officers that are role models for change combine tenacity, hypervigilance, and adaptability. It’s hardly unexpected that they’re hard to come by. I just observed statistics that indicated a 20% growth in demand for transformational leaders year over year, yet the talent pool is quite restricted.

Many businesses have considered transformation in the context of their sustainability objectives or net-zero pledges. How do they strike a balance between, for example, financial stability and supply chain resilience and reaching net zero?

I don’t believe there is a single correct solution. It is in the best interests of the organization. There is an expectation that there must be a compromise, but in my experience, most transformations that adhere to best practices outperform by 20% to 30% in terms of value and timeframe. If you can accomplish that, you create capacity, and your ability to take on new tasks or keep things running increases, allowing you to integrate sustainability priorities.

Businesses are being pressured from all sides, whether they are in a recession or not: decades-high inflation, heightened geopolitical tensions, long-term supply chain disruptions and pandemic-related concerns, labor shortages and pay constraints, and financial challenges for their digital and ESG agendas. Add to that rising investor activism and the likelihood of a comeback in M&A activity, and you have a potpourri of colossal issues.

As businesses consider how to free up cash to save money and strengthen balance sheets, many are turning to zero-based transformation (ZBT). ZBT extends beyond selling, general, and administrative (SG&A) expenses to take a cross-business-unit, cross-functional perspective of the whole company. It is built on zero-based budgeting concepts. With ZBT, executives can develop projects from the ground up while assessing strategic choices and collaborating to inculcate a savings mindset.

The value unleashed by ZBT has the potential to be a huge source of growth.

ZBT can provide top-line advantages, restructure cost structures, and free up investment money, releasing substantial value that can be used to fuel growth. However, this strategic approach necessitates a significant shift in thinking—as well as changes in how a firm and its employees function. In that regard, it is more than a discipline.

ZBT, like any other transformation, should be implemented proactively, even during a downturn. Historically, firms that invest during economic downturns emerge much stronger. Rather of worrying about how to survive a slump, effective businesses plan to prosper regardless of the economic climate. Companies that have never used zero-based budgeting—or aren’t utilizing it to drive growth—should do it now, before the economy puts their survival skills to the test.

Not Your Average Cost Program

Long-term total shareholder return (TSR) is mostly determined by growth. When businesses react to a recession by implementing broad-brush cost-cutting initiatives, they can set off a negative cycle of dropping revenues and diminishing margins, leaving a smaller pool of money available for investment.

Zero-based budgeting has always been opposed to broad cost-cutting. It requires reviewing spending methodically and, in many circumstances, resetting budgets on a yearly basis to guarantee the most efficient and effective use of resources. ZBT takes a step further by intimately integrating with a company’s business plan and growth levers. ZBT advocates for the distinction between high-value-adding expenses from low-value-adding costs. The goal is to shift unproductive expenditure to more strategic, growth-oriented applications.

When implementing ZBT, businesses begin with three questions: What is our long-term goal? What investments are required to achieve it? And how should the cost base be structured to allow for such investments? This strategy understands that funding investments and possibilities for development requires more than just cost restraint. ZBT, like its predecessor, is not a one-time activity; rather, it is a style of doing business that pervades everything a firm does.

The Advantages of ZBT

Zero-based budgeting has long been popular among consumer goods corporations, who were early adopters. However, its popularity has grown across sectors for good reason: it is applicable to every business and provides significant advantages at key moments. Increasing uncertainty, competitive pressures, and global economic instability, as well as the ever-present danger of disruption, need firms being as lean, agile, and adaptable as feasible. ZBT, a more advanced form of zero-based budgeting, may be the most significant approach for a corporation to improve itself, both defensively and offensively.

ZBT believes in the potential to deliberately target cost reduction while releasing cash for expansion. ZBT exposes previously hidden expenses since expenditures are categorized based on their kind rather than their location of origin. This increased openness, along with explicit cost responsibility and cost-management strategies, promotes and encourages the much-needed discipline that enables businesses to better identify high- and low-value expenditures and make deliberate, strategic choices.

ZBT gives the cost transparency that allows businesses to make informed, strategic choices.

This openness facilitates de-averaging for multinational firms, which is especially crucial during downturns. It makes little sense to use a global cost-cutting agenda or a cookie-cutter approach to operations across markets and areas with varying circumstances and possibilities.

ZBT not only ensures cost base efficiency, but it also simplifies and provides organizational efficiencies. Cost cutting is fundamentally the strategic enabler: you eliminate bloat to finance opportunity and agility.

Preventive Transformation Is Beneficial

Even with typical zero-based budgeting, proactive adoption is important. Consider how it paid off for two global leaders. Consumer products conglomerate carefully cut 25% of its SG&A budget, using the savings to effectively stave off a takeover. During the pandemic, a premium-spirits manufacturer cut 20% from its budget, which it reinvested in its brands. As a consequence, the company saw unprecedented growth.

According to BCG Henderson Institute research, any kind of anticipatory transformation has a higher reward since it increases a company’s ability to flourish rather than just survive. The Institute examined hundreds of business changes undertaken by significant, publicly traded US corporations during the last decade. It discovered that organizations that adopt change in advance produce considerably more long-term value than those that react reactively. In the three years after the start of a transformation, the annualized TSR of preemptive transformers was three percentage points greater than the annualized TSR of reactive transformers. Furthermore, the preemption premium has long-term implications: the sooner a firm adapts, the greater its future performance. In fact, it is the most visible success element in organizational change.

Acting ahead of time has other advantages, including the ability to complete the transition sooner and at a lower cost. These two advantages add up to a return on investment that is around 50% larger than the ROI of a reactive transformation.

Perspectives on Strategy and Value: How to Create Long-Term Value in an Uncertain World.

When we contemplate the destiny of organizations that wait to move, the importance of proactively restructuring the cost base, as with other forms of change, is very obvious. Companies repeatedly tolerated increased expenses in the decade leading up to the global financial crisis, which started in 2007, as long as those charges helped achieve sufficient volumes. When the financial crisis hit and volumes fell, those firms were forced to cut their absolute cost base in order to keep the bottom line as stable as possible. Most businesses were caught off guard; although warning signals of a slowdown were there, many misjudged the severity of the impending slump and hesitated to respond. For the most part, their efforts were too little, too late.

Keeping the Momentum

Companies must sustain strategic momentum regardless of market circumstances in order to remain poised for growth. They must maintain marketing support, make internal changes, take advantage of M&A prospects, and drive innovation. One advantage is that such activities are often less expensive during recessions and out of reach for cash-strapped rivals.

A major consumer products business adopted similar efforts during the Great Recession. It not only carried out its advertising and marketing strategy, taking advantage of the decrease in media rates to gain greater coverage for the same cost; it also increased its marketing investment by an unprecedented double-digit percentage. While competitors faded from view and were forced to drop prices due to growing expenses, the corporation increased investment in its brands, dismissing common worries about the intrusion of private-label sales. Despite weak growth in home items, the business managed a 10% organic top-line increase in a year.

Outperformers during a recession continue to dominate the market for years thereafter.

Cutting R&D, an unavoidable step for most organizations in reactive mode, may have long-term negative effects on innovation. During the crisis, when rivals cut R&D expenditure, the consumer goods business continued to engage in innovation—an important move, given that new items and line expansions often sell better and fetch higher prices in that market. Executives believed that regardless of economic situations, customers would willingly pay extra for innovation—and they were correct. The corporation generated record earnings despite the worst global recession in 70 years.

Outperformers in a downturn often stay market leaders (in terms of sales and stock price) for years thereafter, and this business was no exception. From 2007 to 2012, at the depths of the recent recession and well into the recovery, the firm considerably outperformed its rivals in TSR; it also outperformed the S&P 500 and the S&P 500 Consumer Staples Index. More notably, the firm has maintained its strong TSR performance for more than a decade.

A Shift in Ways of Thinking, Working, and Culture

ZBT can only take root in the correct organizational setting since it is both an attitude and a method of functioning. (For further information, see the sidebar “Shaping a ZBT Culture.”) Cultural transformation must begin at the top. The CEO and CFO must be actively engaged in identifying not just why ZBT should be implemented, but also in expressing how it will help to the company’s long-term success.

The CEO and CFO must also design the best ZBT program. They, like other leaders, will need to refocus their efforts, acknowledging that ZBT is a long-term journey and that everyone must embrace the new culture of cost responsibility. Leaders must demonstrate the desirable behaviors through communicating, setting priorities, and interacting with people. Leaders may also agree on how to reinvest savings for development from the start and convey that commitment to the rest of the business.

HELPING TO CREATE A ZBT CULTURE

Companies may construct the organizational environment in a variety of ways, including tying desirable behaviors to performance management incentives, educating and engaging employees, conveying the what and why, and putting in place the necessary tools. The goal is to improve efficiency. The goal is not just to remove waste, but also to simplify processes and structures while avoiding the creation of new ones.

For all of these reasons, change management is critical to the long-term viability of a ZBT. Companies must define the reasoning and message, identify those most impacted and build a strategy for engaging them, and support the development of all the levers that will assist construct the correct organizational environment at the macro level. Companies must assist frame the message for each project in a positive, actionable light (“go paperless,” for example, rather than “no more printing”).

When used correctly, ZBT can do much more than just instill cost discipline—it can help businesses keep their strategic momentum even in challenging economic times. Historically, freeing up resources to invest in growth is especially vital during a slump. It provides businesses with a huge advantage over rivals, many of which will struggle to survive. And that advantage may last: firms that do well during a slump enjoy a performance premium even after the economy recovers.

Because it is not a one-time effort, ZBT adoption requires a shift in mindset and attitude, which takes time to establish. Companies may become more agile, robust, and prepared for future difficulties by taking action today.