WEBVTT 00:00:00.000 --> 00:00:02.459 Imagine this. You walk into your office on January 00:00:02.459 --> 00:00:06.139 1st and the entire budget for the year is, well, 00:00:06.240 --> 00:00:08.580 it's zero. Literally zero. Not, you know, last 00:00:08.580 --> 00:00:11.480 year's budget minus a bit. We're talking a complete 00:00:11.480 --> 00:00:15.199 clean slate. A total reset. And every single 00:00:15.199 --> 00:00:17.320 expense, I mean everything from the paper clips 00:00:17.320 --> 00:00:19.399 in the drawer and heating the building, all the 00:00:19.399 --> 00:00:22.120 way up to your biggest strategic project. Every 00:00:22.120 --> 00:00:25.100 line item. It has to be completely re -justified. 00:00:25.420 --> 00:00:28.579 From scratch. And if you can't prove right now... 00:00:28.859 --> 00:00:31.019 that it's absolutely indispensable for this year. 00:00:31.140 --> 00:00:33.799 The funding's just gone. It vanishes. It sounds 00:00:33.799 --> 00:00:35.799 like a corporate nightmare, right? An annual 00:00:35.799 --> 00:00:38.320 inquisition for every single dollar. It does. 00:00:38.640 --> 00:00:42.140 But that right there is the fundamental radical 00:00:42.140 --> 00:00:44.619 idea behind something called zero -based budgeting, 00:00:44.759 --> 00:00:47.619 or ZBB. It's an attempt really to enforce a kind 00:00:47.619 --> 00:00:50.219 of pure, cold -blooded efficiency. And that's 00:00:50.219 --> 00:00:52.570 exactly what we're going to dig into today. We've 00:00:52.570 --> 00:00:54.329 gone through the source material and it lays 00:00:54.329 --> 00:00:57.890 out this really chaotic history of ZBB, its demanding 00:00:57.890 --> 00:01:00.469 mechanics and how it's been applied, often brutally, 00:01:00.609 --> 00:01:03.310 in both the public and private sectors. Right. 00:01:03.450 --> 00:01:06.349 And our goal here is for you, the listener, to 00:01:06.349 --> 00:01:08.870 get past that simple definition. We want to really 00:01:08.870 --> 00:01:12.290 understand the true cost, not just the financial 00:01:12.290 --> 00:01:14.870 cost, but the organizational cost of doing this. 00:01:15.030 --> 00:01:17.689 Because it's so strange. On one hand, you have 00:01:17.689 --> 00:01:20.849 it being hailed as this. This cost saving miracle. 00:01:21.049 --> 00:01:22.930 Especially by corporate acquirers. Yeah. But 00:01:22.930 --> 00:01:26.090 on the other, it gets blamed for creating total 00:01:26.090 --> 00:01:28.730 bureaucratic paralysis. And sometimes, you know, 00:01:28.750 --> 00:01:31.329 even for corporate failure years down the line. 00:01:31.370 --> 00:01:33.269 So we're going to analyze the core of it. These 00:01:33.269 --> 00:01:35.329 things called decision packages and trace the 00:01:35.329 --> 00:01:37.489 whole story from the U .S. federal government's 00:01:37.489 --> 00:01:39.150 big struggle with it under President Carter. 00:01:39.609 --> 00:01:41.430 all the way to the Chinese government trying 00:01:41.430 --> 00:01:43.469 to adapt it. And then, of course, it's ruthless 00:01:43.469 --> 00:01:47.370 use by firms like 3G Capital. At its heart, the 00:01:47.370 --> 00:01:49.769 idea is that every expense has to be justified 00:01:49.769 --> 00:01:52.769 and approved in each new budget period. You start 00:01:52.769 --> 00:01:55.430 from that zero base. No funding just automatically 00:01:55.430 --> 00:01:58.129 rolls over from last year. The intended goal, 00:01:58.230 --> 00:02:00.989 I guess, is to force managers to really assess 00:02:00.989 --> 00:02:03.510 if they're using resources efficiently. Can you 00:02:03.510 --> 00:02:06.349 provide this service at a lower cost or should 00:02:06.349 --> 00:02:09.379 it even exist at all? Exactly. But the sources 00:02:09.379 --> 00:02:12.539 are really clear on this from the get -go. There's 00:02:12.539 --> 00:02:15.719 a massive trade -off. A huge one. That potential 00:02:15.719 --> 00:02:18.159 for savings comes at an enormous expense. The 00:02:18.159 --> 00:02:21.680 organizational effort involved is, well, it's 00:02:21.680 --> 00:02:24.080 like putting the entire company through a complete 00:02:24.080 --> 00:02:26.060 restructure. Every single budget cycle. Every 00:02:26.060 --> 00:02:29.199 year. And that's a level of pain that, frankly, 00:02:29.340 --> 00:02:31.960 very few organizations are willing to endure. 00:02:32.460 --> 00:02:35.219 Okay, so let's unpack the architecture of this. 00:02:35.859 --> 00:02:38.219 This pretty intense system. Where did it even 00:02:38.219 --> 00:02:41.020 come from? Well, the history of ZBB doesn't start 00:02:41.020 --> 00:02:42.759 in Washington or on Wall Street, which is what 00:02:42.759 --> 00:02:44.699 you might expect. Right. It starts somewhere 00:02:44.699 --> 00:02:48.520 much more domestic. It starts with an accounting 00:02:48.520 --> 00:02:51.400 manager at Texas Instruments in Dallas. This 00:02:51.400 --> 00:02:53.620 was back in the early 1970s. Right. A man named 00:02:53.620 --> 00:02:56.900 Peter Peer. And he's the original architect of 00:02:56.900 --> 00:02:58.819 the whole system. And what was his motivation? 00:02:58.819 --> 00:03:00.800 Was he just trying to find a better way to cut 00:03:00.800 --> 00:03:03.919 costs? That's the most important detail to understand 00:03:03.919 --> 00:03:06.780 about ZBB. Because, no, he wasn't just inventing 00:03:06.780 --> 00:03:09.099 a better knife for cutting the fat. His main 00:03:09.099 --> 00:03:12.020 goal was to improve strategic management. He 00:03:12.020 --> 00:03:14.500 wanted to bake strategic objectives right into 00:03:14.500 --> 00:03:18.659 the budgeting process. How? By tying the cost 00:03:18.659 --> 00:03:21.180 justification to the actual functional areas 00:03:21.180 --> 00:03:23.180 that are supposed to be achieving those objectives. 00:03:23.479 --> 00:03:26.039 Precisely. So he wasn't just asking that classic 00:03:26.039 --> 00:03:28.300 question, how much did you spend last year? Right. 00:03:28.379 --> 00:03:31.539 He was forcing managers to answer a totally different 00:03:31.539 --> 00:03:35.159 and much harder question. What are you trying 00:03:35.159 --> 00:03:37.599 to accomplish this year and what's the absolute 00:03:37.599 --> 00:03:40.580 minimum you need to get it done? That is fundamentally 00:03:40.580 --> 00:03:42.979 different from traditional budgeting. Oh, completely. 00:03:43.180 --> 00:03:45.759 Traditional budgeting, it suffers from this thing 00:03:45.759 --> 00:03:48.719 accountants call incrementalism or momentum funding. 00:03:49.039 --> 00:03:51.439 I think I know what you mean. If the IT department, 00:03:51.560 --> 00:03:54.300 say, spent $10 million last year. They automatically 00:03:54.300 --> 00:03:57.629 expect $10 million plus, you know. a 3 % or 4 00:03:57.629 --> 00:04:00.210 % bump for inflation next year. Regardless of 00:04:00.210 --> 00:04:02.449 whether that $10 million was used well or if 00:04:02.449 --> 00:04:04.509 half the projects are even still relevant. Yes. 00:04:04.810 --> 00:04:08.370 That old system, it just inherently rewards managers 00:04:08.370 --> 00:04:10.550 who make sure to spend their entire budget by 00:04:10.550 --> 00:04:12.289 the end of the year. Because they're afraid if 00:04:12.289 --> 00:04:14.370 they don't, they'll lose it next year. The classic 00:04:14.370 --> 00:04:17.529 use it or lose it. Exactly. Peer's method just. 00:04:18.370 --> 00:04:20.769 It cuts that historical momentum completely. 00:04:21.390 --> 00:04:24.610 It forces management to allocate money based 00:04:24.610 --> 00:04:27.589 strictly on current needs and what they expect 00:04:27.589 --> 00:04:29.990 to achieve, not just on what they did last time. 00:04:30.269 --> 00:04:32.750 That level of rigor, I mean, it must have been 00:04:32.750 --> 00:04:36.009 revolutionary in the early 70s. It was. And that 00:04:36.009 --> 00:04:39.129 focus on radical transparency, on linking every 00:04:39.129 --> 00:04:41.889 dollar to a clear objective, meant it got noticed 00:04:41.889 --> 00:04:44.269 pretty quickly. By anyone looking to reform a 00:04:44.269 --> 00:04:47.569 big, sprawling, inefficient bureaucracy, I'd 00:04:47.569 --> 00:04:50.329 imagine. Whether corporate or public. Which brings 00:04:50.329 --> 00:04:52.730 us to its political debut, which was pretty surprising. 00:04:52.829 --> 00:04:54.629 Where did it pop up? Peter Peer was appointed 00:04:54.629 --> 00:04:56.610 by the governor of Georgia at the time, a guy 00:04:56.610 --> 00:04:59.069 named Jimmy Carter, to manage the state's entire 00:04:59.069 --> 00:05:01.990 budget. Wow. OK, so right into the public sector. 00:05:02.170 --> 00:05:04.550 Right into the fire. This was a huge proving 00:05:04.550 --> 00:05:07.810 ground. It was for the state's 1973 fiscal budget. 00:05:08.050 --> 00:05:11.329 And it showed that ZBB wasn't just for, you know, 00:05:11.329 --> 00:05:13.730 a predictable manufacturing company. It could, 00:05:13.810 --> 00:05:15.949 in theory, wrestle with the massive complexity 00:05:15.949 --> 00:05:19.060 of a state bureaucracy. In theory, yes. So let's 00:05:19.060 --> 00:05:22.040 get into the mechanics of it. Pyre's system, 00:05:22.180 --> 00:05:25.180 it requires managers to create these super detailed 00:05:25.180 --> 00:05:27.579 documents for every activity. He called them 00:05:27.579 --> 00:05:29.860 decision packages. Right. And these decision 00:05:29.860 --> 00:05:33.279 packages, they are the absolute heart of CBB. 00:05:33.439 --> 00:05:36.079 How so? They're what transforms these big, vague 00:05:36.079 --> 00:05:40.199 spending categories into granular, action -oriented 00:05:40.199 --> 00:05:44.079 proposals. Each package for every activity has 00:05:44.079 --> 00:05:46.639 to answer four basic questions. Okay. What are 00:05:46.639 --> 00:05:50.220 they? One. What is the activity? Two, what is 00:05:50.220 --> 00:05:52.759 its purpose? Three, what are the quantifiable 00:05:52.759 --> 00:05:55.600 costs? And four, what are the measurable benefits? 00:05:55.899 --> 00:05:58.879 Or, and this is key, what happens if this activity 00:05:58.879 --> 00:06:00.939 isn't funded at all? And you mentioned they're 00:06:00.939 --> 00:06:02.639 not static. It's not like you just asked for 00:06:02.639 --> 00:06:04.339 half a million for marketing. You have to propose 00:06:04.339 --> 00:06:06.620 different funding levels. This is where the real 00:06:06.620 --> 00:06:09.160 work and, frankly, the pain of ZBB really comes 00:06:09.160 --> 00:06:11.860 into focus. For every single functional area. 00:06:12.300 --> 00:06:14.560 let's say customer service, the manager has to 00:06:14.560 --> 00:06:17.040 submit at least three or four distinct packages. 00:06:17.240 --> 00:06:19.079 All ranked in order of priority. All ranked. 00:06:19.220 --> 00:06:21.720 So first you have what's called the base or minimum 00:06:21.720 --> 00:06:24.000 package. The zero base we keep talking about. 00:06:24.199 --> 00:06:28.120 It is. It outlines the absolute bare bones minimum 00:06:28.120 --> 00:06:30.500 funding you need to keep the program operational 00:06:30.500 --> 00:06:34.300 and, you know, legally compliant. As we'll get 00:06:34.300 --> 00:06:36.920 into later, defining that minimum is incredibly 00:06:36.920 --> 00:06:40.079 subjective, but it's the floor. This is the, 00:06:40.180 --> 00:06:41.560 if we don't get at least this much, we might 00:06:41.560 --> 00:06:43.319 as well just shut the whole department down package. 00:06:43.620 --> 00:06:46.139 Pretty much. Then second, you have the current 00:06:46.139 --> 00:06:48.480 package. This is the money you'd need to maintain 00:06:48.480 --> 00:06:50.740 the current level of service, but using the most 00:06:50.740 --> 00:06:53.000 efficient methods you can find. So if you spent 00:06:53.000 --> 00:06:55.639 a million last year, maybe the current package 00:06:55.639 --> 00:06:59.560 is $950 ,000 this year. If you found some savings, 00:06:59.620 --> 00:07:02.259 but you're still achieving the same output. Correct. 00:07:02.279 --> 00:07:04.980 And then you move into growth. Okay. The third 00:07:04.980 --> 00:07:07.000 type is the improvement or enhanced package. 00:07:07.470 --> 00:07:10.290 This describes, you know, additional incremental 00:07:10.290 --> 00:07:13.589 funding levels that would lead to real demonstrable 00:07:13.589 --> 00:07:15.889 improvements. For instance, funding package three 00:07:15.889 --> 00:07:19.089 might let the customer service team cut wait 00:07:19.089 --> 00:07:21.670 times by 20 percent because they can buy new 00:07:21.670 --> 00:07:24.490 software. Exactly. And the fourth, which is sometimes 00:07:24.490 --> 00:07:27.529 separate, is the true zero package. The consequences 00:07:27.529 --> 00:07:31.029 of total elimination. What happens if this function 00:07:31.029 --> 00:07:35.199 just ceases to exist tomorrow? Wow. And once 00:07:35.199 --> 00:07:37.319 all these packages are created, they're not just 00:07:37.319 --> 00:07:39.600 looked at in a silo, right? They're ranked against 00:07:39.600 --> 00:07:41.800 every other department. That's the key. They're 00:07:41.800 --> 00:07:43.819 ranked against packages from everywhere in the 00:07:43.819 --> 00:07:46.459 organization. The customer service enhanced package 00:07:46.459 --> 00:07:49.420 might end up ranked lower than the R &D team's 00:07:49.420 --> 00:07:52.100 minimum package. And that forces a tradeoff. 00:07:52.259 --> 00:07:55.240 It does. Funds are then allocated down that master 00:07:55.240 --> 00:07:58.040 rank list until the total budget is gone. So 00:07:58.040 --> 00:08:01.259 whatever falls below that cutoff line, it just 00:08:01.259 --> 00:08:03.160 doesn't get funded for the year. It's dead for 00:08:03.160 --> 00:08:05.740 the year. That level of cross -functional ranking, 00:08:05.899 --> 00:08:08.660 it sounds incredibly complex, but it is also 00:08:08.660 --> 00:08:10.980 incredibly powerful for forcing an organization 00:08:10.980 --> 00:08:13.560 to admit what its real priorities are. No more 00:08:13.560 --> 00:08:15.480 hiding. If you run out of money after package 00:08:15.480 --> 00:08:18.160 200, then package 201, no matter how passionately 00:08:18.160 --> 00:08:20.839 its manager defends it, is gone. The logic is 00:08:20.839 --> 00:08:23.199 compelling. You start from a clean slate to see 00:08:23.199 --> 00:08:26.360 if things can be done cheaper. But the operational 00:08:26.360 --> 00:08:30.389 lift, it is immense. Which is why we have to 00:08:30.389 --> 00:08:33.029 talk about that great tradeoff. All right. Let's 00:08:33.029 --> 00:08:35.250 start this section by putting ourselves in the 00:08:35.250 --> 00:08:38.129 shoes of a CFO. You're using traditional budgeting. 00:08:38.250 --> 00:08:41.529 You're sick of the waste. Why is ZBB so appealing? 00:08:42.110 --> 00:08:45.059 The sales pitch has to be pretty potent. It's 00:08:45.059 --> 00:08:47.220 incredibly potent. The main advantage is its 00:08:47.220 --> 00:08:50.240 surgical ability to just sever organizational 00:08:50.240 --> 00:08:53.100 inertia. Breaking that historical spending momentum 00:08:53.100 --> 00:08:55.379 you mentioned. Exactly. If you've got a department 00:08:55.379 --> 00:08:57.419 running some outdated piece of software that 00:08:57.419 --> 00:08:59.940 costs a million a year and nobody even remembers 00:08:59.940 --> 00:09:03.070 why they bought it. ZBB forces that cost out 00:09:03.070 --> 00:09:05.370 into the open for a full justification. So it 00:09:05.370 --> 00:09:07.450 has this huge potential for rooting out that 00:09:07.450 --> 00:09:10.129 kind of systemic, long -term, redundant spending. 00:09:10.490 --> 00:09:12.330 It does. And it changes the whole behavioral 00:09:12.330 --> 00:09:14.669 dynamic for managers, doesn't it? It seems like 00:09:14.669 --> 00:09:17.090 it would. Under the old system, you're incentivized 00:09:17.090 --> 00:09:19.529 to spend everything or you lose it. Right. But 00:09:19.529 --> 00:09:21.490 under ZBB, you're incentivized to propose the 00:09:21.490 --> 00:09:23.830 leanest, most efficient structure possible for 00:09:23.830 --> 00:09:25.840 your department. Because you know you're competing 00:09:25.840 --> 00:09:28.779 for scarce resources with every other manager 00:09:28.779 --> 00:09:31.519 in the company. Precisely. And our sources point 00:09:31.519 --> 00:09:35.159 out something interesting. VBB can actually improve 00:09:35.159 --> 00:09:38.799 internal communication. How so? Because every 00:09:38.799 --> 00:09:42.220 single expense is up for review. Employees from 00:09:42.220 --> 00:09:44.320 all over the company have to get involved in 00:09:44.320 --> 00:09:46.769 the decision making. When you have to defend 00:09:46.769 --> 00:09:49.950 your entire function from a zero base, you need 00:09:49.950 --> 00:09:52.570 input from everyone who relies on you to build 00:09:52.570 --> 00:09:55.169 the strongest case. That's a side of it that's 00:09:55.169 --> 00:09:57.309 often overlooked. It pulls the budgeting process 00:09:57.309 --> 00:09:59.409 out of the back rooms at the accounting department 00:09:59.409 --> 00:10:01.750 and puts it right on the operational floor. And 00:10:01.750 --> 00:10:05.049 this is crucial for big companies. ZBB doesn't 00:10:05.049 --> 00:10:08.669 have to be this yearly organizational trauma 00:10:08.669 --> 00:10:11.240 for everyone at once. You can stagger it. Right. 00:10:11.379 --> 00:10:13.860 You can use it as a rolling process. Spread the 00:10:13.860 --> 00:10:16.259 pain over, say, a three -year cycle. So maybe 00:10:16.259 --> 00:10:18.860 this year, only R &D and marketing have to go 00:10:18.860 --> 00:10:22.360 through the full ZBB review, and next year, it's 00:10:22.360 --> 00:10:25.259 finance and operations. Exactly. That makes the 00:10:25.259 --> 00:10:26.980 whole concept a lot more palatable for these 00:10:26.980 --> 00:10:29.700 massive global companies. Okay, so those are 00:10:29.700 --> 00:10:32.240 the upsides. Surgical cost control, strategic 00:10:32.240 --> 00:10:35.559 alignment, breaking inertia. But now we have 00:10:35.559 --> 00:10:38.059 to talk about the price. The significant operational 00:10:38.059 --> 00:10:41.480 costs that make a full, pure... zbb implementation 00:10:41.480 --> 00:10:45.259 well doubtful in almost any large organization 00:10:45.259 --> 00:10:47.279 this is where the organization really starts 00:10:47.279 --> 00:10:50.549 to pay for all that efficiency with what Administrative 00:10:50.549 --> 00:10:52.629 paralysis. That's the good way to put it. The 00:10:52.629 --> 00:10:55.190 most immediate downside is the just sheer time 00:10:55.190 --> 00:10:58.610 and resource drain. Developing and ranking hundreds, 00:10:58.730 --> 00:11:01.950 maybe thousands of these granular decision packages 00:11:01.950 --> 00:11:04.789 takes a ton of time, a ton of effort. And you 00:11:04.789 --> 00:11:07.169 often need more staff just to manage the paperwork 00:11:07.169 --> 00:11:09.769 and the data analysis. It's essentially a complete 00:11:09.769 --> 00:11:12.389 formal restructuring of the organization every 00:11:12.389 --> 00:11:14.370 single time you run the process. That sounds 00:11:14.370 --> 00:11:16.129 absolutely exhausting. I mean, think about the 00:11:16.129 --> 00:11:17.870 average manager. They're already supposed to 00:11:17.870 --> 00:11:21.029 be managing people. output strategy. And now 00:11:21.029 --> 00:11:23.529 they have to dedicate weeks, maybe months, just 00:11:23.529 --> 00:11:25.950 compiling data to defend their own existence. 00:11:26.269 --> 00:11:28.809 And because the stakes are so high, the survival 00:11:28.809 --> 00:11:31.429 of your project, maybe even your team, is on 00:11:31.429 --> 00:11:34.529 the line. It invites the worst possible outcome. 00:11:34.809 --> 00:11:37.710 Political gaming. Yeah. You run this massive 00:11:37.710 --> 00:11:41.389 risk of managers just dedicating all their effort 00:11:41.389 --> 00:11:44.210 to crafting these perfect justifications for 00:11:44.210 --> 00:11:47.009 what are fundamentally their pet projects. They 00:11:47.009 --> 00:11:50.519 frame them as Absolutely necessary to ensure 00:11:50.519 --> 00:11:53.279 their own survival or, you know, their department's 00:11:53.279 --> 00:11:56.559 power. So ZBB, which is supposed to remove subjectivity, 00:11:56.679 --> 00:11:58.779 actually ends up rewarding the most politically 00:11:58.779 --> 00:12:01.879 savvy managers, the best writers and presenters. 00:12:02.159 --> 00:12:03.960 Not necessarily the most essential functions. 00:12:04.279 --> 00:12:06.919 That's a huge consequence. It is. And the difficulty 00:12:06.919 --> 00:12:10.200 of justifying things is made even worse by by 00:12:10.200 --> 00:12:13.340 external uncertainty. How can a department justify 00:12:13.340 --> 00:12:16.460 a rigid budget a year out? when they don't know 00:12:16.460 --> 00:12:18.379 what the market is going to do. Or if their supply 00:12:18.379 --> 00:12:20.899 chain is going to be disrupted. It forces them 00:12:20.899 --> 00:12:23.620 to make these hard -ranked choices today based 00:12:23.620 --> 00:12:25.580 on performance metrics that might be totally 00:12:25.580 --> 00:12:28.120 irrelevant in six months. Right. And finally, 00:12:28.179 --> 00:12:31.080 there's the managerial rigidity problem. All 00:12:31.080 --> 00:12:33.399 that time managers spend on these decision packages, 00:12:33.600 --> 00:12:35.980 it comes at the expense of their other duties. 00:12:36.220 --> 00:12:39.419 Like actual strategic planning or, I don't know, 00:12:39.500 --> 00:12:42.179 innovation responding to the market. And that 00:12:42.179 --> 00:12:44.419 focus creates a dangerous lack of flexibility. 00:12:44.879 --> 00:12:47.240 When your managers are locked into this high 00:12:47.240 --> 00:12:49.539 effort budget defense, they can't react quickly 00:12:49.539 --> 00:12:51.679 to sudden changes. Like a surprise competitor 00:12:51.679 --> 00:12:54.740 or a departmental emergency that needs immediate, 00:12:54.820 --> 00:12:57.200 unexpected funding. The money might be delayed 00:12:57.200 --> 00:12:59.440 because the managerial staff is just buried in 00:12:59.440 --> 00:13:02.500 the ZBB process. Your operational agility, your 00:13:02.500 --> 00:13:05.179 speed of decision making, it just takes a catastrophic 00:13:05.179 --> 00:13:08.220 hit. So it's a fantastic system for trimming 00:13:08.220 --> 00:13:10.720 structural fat, but an absolute nightmare for 00:13:10.720 --> 00:13:13.240 responding to a crisis or seizing an opportunity. 00:13:13.500 --> 00:13:16.320 Seems so. The unique value which both Pyre and 00:13:16.320 --> 00:13:19.259 later firms like 3G really capitalized on is 00:13:19.259 --> 00:13:21.679 that mandatory strategic alignment. An audit 00:13:21.679 --> 00:13:24.500 looks backwards. It flags misuse of funds. But 00:13:24.500 --> 00:13:28.440 ZBB forces you to look forward. And ask, if we 00:13:28.440 --> 00:13:30.139 were rebuilding this company from scratch today, 00:13:30.259 --> 00:13:32.860 would we even fund this activity? It's a sheer 00:13:32.860 --> 00:13:34.960 force that question that makes ZBB so attractive, 00:13:35.139 --> 00:13:37.779 despite all the pain. It's a tool for institutional 00:13:37.779 --> 00:13:40.059 introspection, not just for flagging expenses. 00:13:40.460 --> 00:13:43.720 And this tension, this conflict between efficiency 00:13:43.720 --> 00:13:47.059 and flexibility, that's exactly why ZBB had such 00:13:47.059 --> 00:13:50.360 a complicated and ultimately a very brief run 00:13:50.360 --> 00:13:52.379 in the U .S. government. The public sector's 00:13:52.379 --> 00:13:55.320 attempt at ZBB is this crucial case study. It 00:13:55.320 --> 00:13:58.559 really shows how a rigorous technical concept 00:13:58.559 --> 00:14:01.580 can just collapse under the weight of bureaucracy 00:14:01.580 --> 00:14:04.240 and political reality. So after Jimmy Carter 00:14:04.240 --> 00:14:06.259 was elected president, the federal government 00:14:06.259 --> 00:14:09.700 officially implemented it in the late 1970s. 00:14:09.720 --> 00:14:11.879 Yeah, through the Governed Economy and Spending 00:14:11.879 --> 00:14:15.700 Reform Act of 1976. And the stated goal, according 00:14:15.700 --> 00:14:17.940 to the GAO, the Government Accountability Office, 00:14:18.200 --> 00:14:21.379 was to optimize the outputs you could get at 00:14:21.379 --> 00:14:23.759 different budget levels. Right. The requirement 00:14:23.759 --> 00:14:26.740 was incredibly strict. Agencies had to set priorities 00:14:26.740 --> 00:14:28.919 based on what they could achieve and alternative 00:14:28.919 --> 00:14:31.879 spending levels. And crucially, one of those 00:14:31.879 --> 00:14:33.860 levels had to be below what they were currently 00:14:33.860 --> 00:14:36.840 getting. No more automatic rollovers. None. But 00:14:36.840 --> 00:14:38.399 here's where it immediately got complicated. 00:14:38.980 --> 00:14:41.940 ZBB had three main user groups in the federal 00:14:41.940 --> 00:14:43.659 government, and they all wanted different things 00:14:43.659 --> 00:14:47.019 from it. Okay, so you had... Congress, the legislative 00:14:47.019 --> 00:14:50.059 branch. They needed these broad summaries about 00:14:50.059 --> 00:14:52.960 public priorities, how changes would impact their 00:14:52.960 --> 00:14:55.279 constituents. Then you had the agency level itself, 00:14:55.519 --> 00:14:59.039 the department managers. They needed super detailed 00:14:59.039 --> 00:15:02.169 information on. implementation, workload, operational 00:15:02.169 --> 00:15:04.669 efficiencies. And finally, the executive branch, 00:15:04.870 --> 00:15:06.629 the president and the Office of Management and 00:15:06.629 --> 00:15:09.570 Budget, the OMB, they were trying to synthesize 00:15:09.570 --> 00:15:12.710 it all and focus on major policy issues. Right. 00:15:12.809 --> 00:15:15.230 And even though they had different focuses, they 00:15:15.230 --> 00:15:17.669 all had to answer that one fundamental question. 00:15:18.149 --> 00:15:20.870 Are our current activities effective and should 00:15:20.870 --> 00:15:23.559 they be reduced or just eliminated? But that 00:15:23.559 --> 00:15:25.840 simple question led to this massive confusion 00:15:25.840 --> 00:15:29.399 over what zero base actually meant in practice. 00:15:29.720 --> 00:15:32.139 This is the central misunderstanding. The headline 00:15:32.139 --> 00:15:34.720 definition is simple. Starting budgets from scratch. 00:15:35.139 --> 00:15:37.899 Reviewing every invoice. Exactly. But Peter Sarant, 00:15:38.019 --> 00:15:39.940 who was the director of management analysis training 00:15:39.940 --> 00:15:42.399 during the Carter implementation, he noted that 00:15:42.399 --> 00:15:44.720 ZBB just meant different things to different 00:15:44.720 --> 00:15:46.860 people. Because it's a practical impossibility, 00:15:46.919 --> 00:15:48.980 right? In a huge agency like the Department of 00:15:48.980 --> 00:15:51.500 Defense. Or Health and Human Services. A complete, 00:15:51.639 --> 00:15:55.259 literal, zero -base review of every single program 00:15:55.259 --> 00:15:58.299 in one budget cycle. It's not feasible. You'd 00:15:58.299 --> 00:16:01.080 create a paralyzing amount of paperwork. And 00:16:01.080 --> 00:16:03.240 managers would spend all their time writing justifications 00:16:03.240 --> 00:16:05.740 instead of actually running their programs. So 00:16:05.740 --> 00:16:08.340 if you try to implement ZDB in its purest sense, 00:16:08.580 --> 00:16:10.600 you basically break the government with bureaucracy. 00:16:11.100 --> 00:16:12.860 So what did they do instead? What did it default 00:16:12.860 --> 00:16:15.480 to? It ended up resembling something else entirely. 00:16:16.399 --> 00:16:19.519 A sunset review process. Which is a crucial distinction. 00:16:19.779 --> 00:16:22.419 A sunset review is where a program is given a 00:16:22.419 --> 00:16:25.799 fixed lifespan, say, five years. And when that 00:16:25.799 --> 00:16:28.539 sun sets, the program is just eliminated unless 00:16:28.539 --> 00:16:31.259 there's overwhelming proof that it's still effective 00:16:31.259 --> 00:16:33.879 and necessary. It achieves a similar goal -forcing 00:16:33.879 --> 00:16:36.980 justification, but it's structurally very different 00:16:36.980 --> 00:16:40.379 from ZBB's ranking of alternative funding levels. 00:16:40.519 --> 00:16:43.019 It is. And the sources are very clear. There 00:16:43.019 --> 00:16:45.139 is no evidence that the federal ZBB implementation 00:16:45.139 --> 00:16:48.159 ever actually included building budgets from 00:16:48.159 --> 00:16:50.440 the bottom up or reviewing every invoice. It 00:16:50.440 --> 00:16:53.399 was functionally impossible. So if it wasn't 00:16:53.399 --> 00:16:56.679 a total clean slate, what did zero base actually 00:16:56.679 --> 00:16:59.639 mean in the public sector context back then? 00:16:59.960 --> 00:17:02.039 Well, we can go back to Sarant's definition, 00:17:02.179 --> 00:17:04.319 which came out of that training experience. Yeah. 00:17:04.420 --> 00:17:07.299 They tried to create a measurable standard. And 00:17:07.299 --> 00:17:09.940 what was it? They defined the zero base as the 00:17:09.940 --> 00:17:12.660 minimum level of funding necessary to keep a 00:17:12.660 --> 00:17:15.359 program alive. The level below which it's just 00:17:15.359 --> 00:17:17.900 not feasible to continue because it can't make 00:17:17.900 --> 00:17:20.400 any constructive contribution toward its objective. 00:17:20.859 --> 00:17:24.089 Right. But... Look at the subjectivity in that 00:17:24.089 --> 00:17:27.609 definition. It's huge. Immense. How do you objectively 00:17:27.609 --> 00:17:30.849 define the minimum level for, say, a national 00:17:30.849 --> 00:17:33.789 park program? It just invites political exaggeration. 00:17:33.809 --> 00:17:35.890 Managers will inflate their minimum to protect 00:17:35.890 --> 00:17:38.130 their turf. And if the minimum level is defined 00:17:38.130 --> 00:17:39.930 by the person trying to protect their budget, 00:17:40.170 --> 00:17:42.509 the whole premise of the zero base is undermined. 00:17:42.609 --> 00:17:45.549 It collapses. It does. And the states who had 00:17:45.549 --> 00:17:48.730 tried ZBB before the feds, they saw this flaw 00:17:48.730 --> 00:17:51.670 immediately. So how did they deal with the subjectivity? 00:17:52.160 --> 00:17:54.420 They chose arbitrary percentages. They basically 00:17:54.420 --> 00:17:56.599 took the manager's subjectivity out of the equation. 00:17:56.759 --> 00:17:58.799 So instead of asking the manager, what's your 00:17:58.799 --> 00:18:01.880 minimum viable funding, the state would just 00:18:01.880 --> 00:18:04.319 impose a cut. Exactly. They would stipulate that 00:18:04.319 --> 00:18:08.920 one alternative request must be, say, 80 % of 00:18:08.920 --> 00:18:11.039 last year's funding, whether the manager thought 00:18:11.039 --> 00:18:12.920 that was feasible or not. And that turns the 00:18:12.920 --> 00:18:15.160 process into a measurable analysis of impact. 00:18:15.829 --> 00:18:18.450 It forces the management to detail the real world 00:18:18.450 --> 00:18:21.890 consequences of a 20 % funding cut. That arbitrary 00:18:21.890 --> 00:18:24.910 number became the standardized operational definition 00:18:24.910 --> 00:18:27.950 of the zero base level. It made the ranking process 00:18:27.950 --> 00:18:30.950 tangible, even if it wasn't as philosophically 00:18:30.950 --> 00:18:33.349 pure as Pyre wanted. But no matter how they define 00:18:33.349 --> 00:18:35.609 that zero level, the whole structure, the decision 00:18:35.609 --> 00:18:39.069 packages, the ranking, it all hinges on one critical 00:18:39.069 --> 00:18:41.670 thing. Quality performance measures. You can't 00:18:41.670 --> 00:18:43.569 rank programs against each other without objective 00:18:43.569 --> 00:18:46.650 data. Performance measures are the oxygen ZBB 00:18:46.650 --> 00:18:49.309 breathes. You need robust measures of effectiveness, 00:18:49.549 --> 00:18:53.049 efficiency, workload, everything. If you don't 00:18:53.049 --> 00:18:54.690 know exactly what you're achieving with your 00:18:54.690 --> 00:18:57.089 money, how many citizens served, how many widgets 00:18:57.089 --> 00:18:59.430 produced per dollar, you can't rationally rank 00:18:59.430 --> 00:19:01.250 your decision package against someone else's. 00:19:01.349 --> 00:19:03.789 And the sources show this was the breaking point 00:19:03.789 --> 00:19:06.950 for the federal implementation. The GAO noted 00:19:06.950 --> 00:19:09.150 that agencies complain they just didn't have 00:19:09.150 --> 00:19:12.059 enough time to implement it. specifically because 00:19:12.059 --> 00:19:14.839 they lacked the historical data and the analytical 00:19:14.839 --> 00:19:18.039 capacity to even develop those performance measures 00:19:18.039 --> 00:19:20.700 under deadline. So program managers, they were 00:19:20.700 --> 00:19:23.500 just struggling to identify alternatives or create 00:19:23.500 --> 00:19:25.460 rational packages because they didn't have the 00:19:25.460 --> 00:19:28.099 internal metrics to back them up. They were excellent 00:19:28.099 --> 00:19:30.640 at their jobs, but not at measuring their own 00:19:30.640 --> 00:19:33.440 efficiency in this quantifiable, universally 00:19:33.440 --> 00:19:36.960 comparable way. And without those measures, the 00:19:36.960 --> 00:19:39.539 whole ranking process just falls apart. It goes 00:19:39.539 --> 00:19:41.539 back to being a subjective political decision. 00:19:41.799 --> 00:19:44.299 And that operational difficulty, the paperwork, 00:19:44.619 --> 00:19:47.640 the lack of data, the timelines, it all led to 00:19:47.640 --> 00:19:50.339 ZBB's official elimination from federal budgeting. 00:19:50.480 --> 00:19:53.220 August 7th, 1981. It was gone less than five 00:19:53.220 --> 00:19:54.859 years after it started. But that's not the end 00:19:54.859 --> 00:19:57.049 of the story, is it? The sources say it left 00:19:57.049 --> 00:20:00.529 this enduring legacy. A critical one. ZBB established, 00:20:00.890 --> 00:20:03.529 deep within federal budgeting, the requirement 00:20:03.529 --> 00:20:05.890 to present alternative levels of funding and, 00:20:06.029 --> 00:20:08.730 crucially, to link those levels to alternative 00:20:08.730 --> 00:20:11.349 results. So that structural element, the idea 00:20:11.349 --> 00:20:14.009 of analyzing multiple funding scenarios instead 00:20:14.009 --> 00:20:16.950 of just one big request, that was incredibly 00:20:16.950 --> 00:20:19.789 sticky. It remained in effect through the Reagan, 00:20:19.950 --> 00:20:22.809 Bush, and early Clinton administrations all the 00:20:22.809 --> 00:20:27.309 way until 1994. It shows ZBB's lasting but modified 00:20:27.309 --> 00:20:30.470 influence long after the name itself was scrapped. 00:20:30.609 --> 00:20:33.190 It forced a new kind of transparency. And this 00:20:33.190 --> 00:20:35.029 enduring influence showed up in a couple of practical 00:20:35.029 --> 00:20:37.609 reforms, right? They salvaged the useful parts 00:20:37.609 --> 00:20:40.269 of ZBB. Two notable ones were widely adopted. 00:20:40.470 --> 00:20:42.650 The first was in how budget requests were structured. 00:20:42.869 --> 00:20:45.029 Moving away from the complex decision packages, 00:20:45.130 --> 00:20:47.869 but keeping the idea of scenarios. Right. Departments 00:20:47.869 --> 00:20:49.690 would submit requests with three main tiers. 00:20:49.950 --> 00:20:52.849 A specified cut percentage. the reduction scenario, 00:20:53.190 --> 00:20:55.630 the current spending level, and an increased 00:20:55.630 --> 00:20:58.210 percentage. And that tiered approach, it allowed 00:20:58.210 --> 00:21:00.210 for trading priorities between departments at 00:21:00.210 --> 00:21:02.710 a high level. A department getting a cut might 00:21:02.710 --> 00:21:04.670 be okay with it if they could see the money was 00:21:04.670 --> 00:21:06.769 explicitly going to another department's higher 00:21:06.769 --> 00:21:10.089 priority project. It created a dynamic for resource 00:21:10.089 --> 00:21:12.609 reallocation that just didn't exist before. And 00:21:12.609 --> 00:21:15.170 the second big reform was the widespread adoption 00:21:15.170 --> 00:21:17.829 of sunset legislation, which we touched on earlier. 00:21:18.049 --> 00:21:20.890 Putting programs under periodic legislated review 00:21:20.890 --> 00:21:23.210 to determine their efficiency and necessity. 00:21:23.349 --> 00:21:25.769 It became a standard way to get the accountability 00:21:25.769 --> 00:21:29.230 ZBB was after. But without the massive annual 00:21:29.230 --> 00:21:32.450 administrative burden of the full process. ZBB 00:21:32.450 --> 00:21:36.009 was just too radical for ongoing government life. 00:21:36.390 --> 00:21:39.490 But its core principles, they transformed public 00:21:39.490 --> 00:21:42.029 finance forever. So the challenges the U .S. 00:21:42.029 --> 00:21:44.069 government faced with paperwork and complexity, 00:21:44.309 --> 00:21:47.470 they must have been magnified when ZBB was exported 00:21:47.470 --> 00:21:49.670 to different bureaucratic and economic systems? 00:21:49.730 --> 00:21:52.549 If anything, yes. Let's look at the Chinese adaptation, 00:21:52.950 --> 00:21:55.289 specifically in Hubei province, where the concept 00:21:55.289 --> 00:21:57.369 was introduced in the 1990s. How did that go? 00:21:57.529 --> 00:22:00.089 The initial attempt to use the traditional ZBB 00:22:00.089 --> 00:22:02.750 model failed almost immediately. The sources 00:22:02.750 --> 00:22:05.410 say the early years were incredibly rocky. What 00:22:05.410 --> 00:22:08.269 happened? Well, only a few departments even implemented 00:22:08.269 --> 00:22:10.829 the reform. which led to this chaotic situation 00:22:10.829 --> 00:22:13.569 where you had multiple departments using different 00:22:13.569 --> 00:22:16.710 incompatible budgeting systems. The results were 00:22:16.710 --> 00:22:19.089 poor, and you couldn't compare them. So the traditional 00:22:19.089 --> 00:22:22.069 model, with its complexity and demand for detailed 00:22:22.069 --> 00:22:24.450 metrics, was just too cumbersome for the Chinese 00:22:24.450 --> 00:22:26.869 bureaucracy at that time. They needed to streamline 00:22:26.869 --> 00:22:29.430 the administrative burden, and their solution 00:22:29.430 --> 00:22:32.450 was to create their own version, target -based 00:22:32.450 --> 00:22:36.430 budgeting. or TBB. A Chinese -styled ZBB. A radical 00:22:36.430 --> 00:22:39.490 modification of it, yeah. TBB required agencies 00:22:39.490 --> 00:22:41.809 to submit a much simpler broad -stroke budget 00:22:41.809 --> 00:22:45.259 within a very rigid preset time limit. It was 00:22:45.259 --> 00:22:48.759 a rapid, modified form of ZBB, focused more on 00:22:48.759 --> 00:22:50.880 hitting broad fiscal targets than on building 00:22:50.880 --> 00:22:54.039 granular decision packages. Did it work? It worked 00:22:54.039 --> 00:22:55.880 moderately well for the Hubei government. It 00:22:55.880 --> 00:22:57.720 helped them stabilize their spending over the 00:22:57.720 --> 00:23:00.339 years. But it suffered from some core compromises 00:23:00.339 --> 00:23:03.059 that really undermined the ZBB philosophy. What 00:23:03.059 --> 00:23:05.539 were the lingering problems with this TBB system? 00:23:05.920 --> 00:23:08.740 A few crucial ones. First, there was no truly 00:23:08.740 --> 00:23:11.079 unified budget across all government functions. 00:23:11.359 --> 00:23:13.920 And second, and this is more damaging to the 00:23:13.920 --> 00:23:17.460 ZBB. CBB concept were the exemptions, exemptions, 00:23:17.460 --> 00:23:19.900 certain massive spending categories were and 00:23:19.900 --> 00:23:22.319 still are exempt from the zero based review. 00:23:22.539 --> 00:23:24.819 What kind of spending was shielded? Things like 00:23:24.819 --> 00:23:27.200 central operating expenses, most personnel costs 00:23:27.200 --> 00:23:30.380 and critically, any government policies or programs 00:23:30.380 --> 00:23:32.539 that started after the budget year began. Wait. 00:23:32.619 --> 00:23:34.740 So if your budget is supposed to be zero based, 00:23:34.859 --> 00:23:39.039 but huge chunks of spending like the entire government 00:23:39.039 --> 00:23:42.339 payroll are automatically excluded, then the 00:23:42.339 --> 00:23:44.680 zero base is immediate. compromised. The effectiveness 00:23:44.680 --> 00:23:47.359 of the whole ranking process is severely limited. 00:23:47.500 --> 00:23:49.980 And just like in the U .S., politics got in the 00:23:49.980 --> 00:23:52.720 way. Of course. High -level officials have their 00:23:52.720 --> 00:23:55.259 priority plans, and that influences where the 00:23:55.259 --> 00:23:57.359 finance department directs money, often just 00:23:57.359 --> 00:23:59.980 overriding the TBB's analytical findings. So 00:23:59.980 --> 00:24:02.460 the central challenge remained unsolved. How 00:24:02.460 --> 00:24:05.319 to isolate objective, efficient spending from 00:24:05.319 --> 00:24:08.640 politically desirable spending. Exactly. While 00:24:08.640 --> 00:24:11.200 China successfully adapted the concept to their 00:24:11.200 --> 00:24:14.200 structure by simplifying it, that core challenge 00:24:14.200 --> 00:24:16.420 remained. But if the public sector struggled 00:24:16.420 --> 00:24:19.980 with ZBB's complexity, the private sector, well, 00:24:20.039 --> 00:24:22.099 they embraced its ruthlessness as a tool for 00:24:22.099 --> 00:24:24.720 immediate, dramatic profit. This is where ZBB 00:24:24.720 --> 00:24:27.380 truly shocked the corporate world and led to 00:24:27.380 --> 00:24:30.480 massive profits, but also intense controversy. 00:24:30.759 --> 00:24:32.700 We're talking about Carlos Brito and the investment 00:24:32.700 --> 00:24:35.559 firm 3G Capital. Right. A protege of Jorge Paul 00:24:35.559 --> 00:24:39.779 Obama. They institutionalized ZBB at Anheuser 00:24:39.779 --> 00:24:42.700 -Busch InBev way back in the 90s. And then they 00:24:42.700 --> 00:24:44.500 aggressively applied it to every single major 00:24:44.500 --> 00:24:47.220 acquisition they made. 3G Capital basically became 00:24:47.220 --> 00:24:51.700 synonymous with ZBB as this radical cost -cutting 00:24:51.700 --> 00:24:53.980 recipe. And they used it relentlessly on brands 00:24:53.980 --> 00:24:57.880 you know. Burger King, Tim Hortons, Heinz, Kraft 00:24:57.880 --> 00:25:01.059 Foods, Popeyes. If 3G acquired you, you knew 00:25:01.059 --> 00:25:03.559 your historical budget was dead on arrival. Absolutely. 00:25:03.980 --> 00:25:05.960 The measures they took were often drastic, designed 00:25:05.960 --> 00:25:07.960 to strip out non -essential spending as quickly 00:25:07.960 --> 00:25:10.779 as possible. The sources detail the obvious things 00:25:10.779 --> 00:25:13.319 like cutting hundreds of management jobs, getting 00:25:13.319 --> 00:25:15.460 rid of the corporate jets. Eliminating entire 00:25:15.460 --> 00:25:17.960 layers of corporate staff. But the philosophy 00:25:17.960 --> 00:25:21.380 of ZBB demands justification for every expense, 00:25:21.599 --> 00:25:25.119 even the small ones. And that led to some shockingly 00:25:25.119 --> 00:25:28.380 simple and often painful measures. Hold on. You 00:25:28.380 --> 00:25:30.259 mentioned the simplicity of some of these cuts. 00:25:30.859 --> 00:25:33.119 Tell us again about the level of micromanagement 00:25:33.119 --> 00:25:35.720 ZBB required at these companies. They eliminated 00:25:35.720 --> 00:25:38.799 things like company cars and free coffee. They 00:25:38.799 --> 00:25:41.680 made executives buy their own stationery. And 00:25:41.680 --> 00:25:44.680 the most famous example, requiring employees 00:25:44.680 --> 00:25:47.140 to physically get permission from a manager. 00:25:47.819 --> 00:25:50.140 just to make photocopies. That seems extreme. 00:25:50.299 --> 00:25:52.660 Isn't that costing more in managerial time than 00:25:52.660 --> 00:25:54.819 it saves in paper? That's the paradox of it. 00:25:54.880 --> 00:25:57.519 It saves very little in paper, but it fundamentally 00:25:57.519 --> 00:25:59.759 changes the corporate culture. It sends a signal. 00:25:59.859 --> 00:26:02.819 A very loud signal from the top down that every 00:26:02.819 --> 00:26:05.559 single expense, no matter how small, is under 00:26:05.559 --> 00:26:09.019 scrutiny. This extreme cost control fueled the 00:26:09.019 --> 00:26:12.259 idea that ZBB is a fix -all for businesses trying 00:26:12.259 --> 00:26:15.339 to rapidly improve profitability after a big 00:26:15.339 --> 00:26:17.500 acquisition. And by the financial metrics that 00:26:17.500 --> 00:26:19.480 shareholders care about, it often works, at least 00:26:19.480 --> 00:26:22.480 in the short term. It absolutely works. Accenture 00:26:22.480 --> 00:26:25.680 provided specific examples. They cited a major 00:26:25.680 --> 00:26:28.759 consumer goods company that achieved 18 % savings 00:26:28.759 --> 00:26:32.289 and saw a 20 % jump in its share price. using 00:26:32.289 --> 00:26:35.170 ZBB. And a commercial bank that unlocked a huge 00:26:35.170 --> 00:26:37.529 amount of capital. Capital that was previously 00:26:37.529 --> 00:26:40.250 just trapped in unnecessary operational spending. 00:26:40.470 --> 00:26:43.829 They successfully reinvested it into going digital. 00:26:43.990 --> 00:26:45.970 So it's not just about cutting, it's about freeing 00:26:45.970 --> 00:26:47.930 up capital for strategic investment that would 00:26:47.930 --> 00:26:50.730 otherwise be impossible. Precisely. We also saw 00:26:50.730 --> 00:26:52.970 a health care company achieve massive savings, 00:26:53.190 --> 00:26:57.329 1 .2 billion pounds, so about 1 .36 billion euros. 00:26:58.059 --> 00:27:00.480 In just three years. And companies like Unilever 00:27:00.480 --> 00:27:03.519 reported that ZBB was improving their marketing 00:27:03.519 --> 00:27:05.579 productivity, streamlining their ad spending. 00:27:05.819 --> 00:27:08.220 So ZBB helps money flow to stockholders instead 00:27:08.220 --> 00:27:10.779 of into unused departments, overfunded programs 00:27:10.779 --> 00:27:13.319 and just wasteful habits. And the most dramatic 00:27:13.319 --> 00:27:15.660 example of this short term gain was the Kraft 00:27:15.660 --> 00:27:17.819 Heinz merger. The financial results there were 00:27:17.819 --> 00:27:20.940 staggering. 3G's initial cost cutting in Kraft, 00:27:21.160 --> 00:27:24.119 all done through ZBB, resulted in stock prices 00:27:24.119 --> 00:27:27.849 jumping 36 percent. This strategy of stripping 00:27:27.849 --> 00:27:30.410 away non -essential spending allowed the new 00:27:30.410 --> 00:27:32.589 company to compete very aggressively on price. 00:27:32.910 --> 00:27:36.150 But this immediate success came with that intense 00:27:36.150 --> 00:27:39.250 controversy, the Kraft Heinz contradiction. Right. 00:27:39.309 --> 00:27:42.049 This highlights the central danger of ZBB when 00:27:42.049 --> 00:27:44.390 it's applied too rigorously or without a long 00:27:44.390 --> 00:27:46.549 -term strategic view. While the immediate cuts 00:27:46.549 --> 00:27:49.410 made shareholders very happy, the later criticism 00:27:49.410 --> 00:27:52.109 was overwhelming. Analysts, former employees. 00:27:52.650 --> 00:27:55.670 They directly blamed 3G's rigorous and potentially 00:27:55.670 --> 00:27:58.470 unsustainable use of ZBB for the company's poor 00:27:58.470 --> 00:28:00.730 performance and massive write downs after that 00:28:00.730 --> 00:28:04.230 2015 merger. Why? What did the ZBB cuts destroy 00:28:04.230 --> 00:28:06.769 that led to that long term failure? They destroyed 00:28:06.769 --> 00:28:10.529 operational muscle, future capability. ZBB, when 00:28:10.529 --> 00:28:12.430 it's used as a blunt instrument, it often targets 00:28:12.430 --> 00:28:14.950 things like R &D, maintenance, brand building. 00:28:15.069 --> 00:28:16.789 Things that don't have an immediate provable 00:28:16.789 --> 00:28:19.150 return on investment. Which makes them easy targets 00:28:19.150 --> 00:28:21.509 for elimination under a zero base review. But 00:28:21.509 --> 00:28:23.950 when you cut R &D, you get product stagnation, 00:28:23.970 --> 00:28:26.309 you cut maintenance, you get operational breakdowns. 00:28:26.329 --> 00:28:28.769 When you starve the core functions to please 00:28:28.769 --> 00:28:31.470 shareholders today, you compromise the company's 00:28:31.470 --> 00:28:34.150 ability to compete tomorrow. It suggests there's 00:28:34.150 --> 00:28:36.609 this critical line where radical efficiency turns 00:28:36.609 --> 00:28:39.450 into operational starvation. You only cut so 00:28:39.450 --> 00:28:41.410 much fat before you start cutting muscle and 00:28:41.410 --> 00:28:45.150 bone. ZBB is a brilliant financial tool. But 00:28:45.150 --> 00:28:47.450 it doesn't solve that very human challenge of 00:28:47.450 --> 00:28:50.049 knowing where the fat ends and where the muscle 00:28:50.049 --> 00:28:54.170 begins. Hashtag hashtag outro. So after all that, 00:28:54.269 --> 00:28:56.809 what does this mean for organizations? We started 00:28:56.809 --> 00:28:59.250 with this, this radical promise of zero -based 00:28:59.250 --> 00:29:01.750 budgeting as the ultimate tool for efficiency. 00:29:02.069 --> 00:29:04.369 But our deep dive confirms that the reality of 00:29:04.369 --> 00:29:07.430 implementing it is anything but simple or consistently 00:29:07.430 --> 00:29:10.579 successful. The fundamental tradeoff of ZBB seems 00:29:10.579 --> 00:29:13.279 crystal clear. On one side, you get radical efficiency, 00:29:13.559 --> 00:29:15.240 you break from historical momentum, and you get 00:29:15.240 --> 00:29:17.460 a sharp, immediate focus on shareholder value. 00:29:17.660 --> 00:29:19.940 But you pay for it. You pay with extremely high 00:29:19.940 --> 00:29:22.799 administrative effort, potential managerial rigidity 00:29:22.799 --> 00:29:25.200 when you need to respond to change. And that 00:29:25.200 --> 00:29:28.619 recurring subjective difficulty of even defining 00:29:28.619 --> 00:29:31.539 the zero base in a meaningful way without it 00:29:31.539 --> 00:29:33.720 just becoming a political game. And that really 00:29:33.720 --> 00:29:37.390 is the key takeaway. ZBB, in its purest form, 00:29:37.509 --> 00:29:39.930 where every single line item is justified from 00:29:39.930 --> 00:29:42.349 scratch every single year, it's likely never 00:29:42.349 --> 00:29:44.970 been fully utilized anywhere, not in public or 00:29:44.970 --> 00:29:47.390 private sectors. The complexity and the administrative 00:29:47.390 --> 00:29:51.289 paralysis that results, it's just too much. The 00:29:51.289 --> 00:29:53.809 human element can't sustain that level of scrutiny 00:29:53.809 --> 00:29:56.509 indefinitely. Yet, its underlying principles 00:29:56.509 --> 00:29:59.009 have stuck around. That mandatory requirement 00:29:59.009 --> 00:30:01.410 to consider alternative funding levels and to 00:30:01.410 --> 00:30:03.769 formally link those scenarios to measurable performance. 00:30:04.349 --> 00:30:06.589 That has fundamentally changed how many organizations, 00:30:07.009 --> 00:30:09.769 public and private, approach justification and 00:30:09.769 --> 00:30:12.349 how they allocate resources. It's a powerful 00:30:12.349 --> 00:30:15.130 system that survives, but only through constant 00:30:15.130 --> 00:30:17.430 necessary modification. Which brings us to our 00:30:17.430 --> 00:30:19.190 final provocative thought for you to consider. 00:30:19.690 --> 00:30:21.910 ZBB is designed to strip away the historical 00:30:21.910 --> 00:30:24.670 momentum of spending, to force managers to be 00:30:24.670 --> 00:30:27.490 completely objective. Given the immense effort 00:30:27.490 --> 00:30:29.769 required and the subjective nature of defining 00:30:29.769 --> 00:30:32.529 that minimum feasible level, a central paradox 00:30:32.529 --> 00:30:35.380 seems to emerge. Doesn't its intense, almost 00:30:35.380 --> 00:30:38.880 adversarial focus on justification? inadvertently 00:30:38.880 --> 00:30:42.079 reward the most politically savvy managers, the 00:30:42.079 --> 00:30:44.259 ones who can best package, market and defend 00:30:44.259 --> 00:30:46.839 their pet projects to survive the ranking process. 00:30:47.180 --> 00:30:49.880 Rather than simply rewarding the programs that 00:30:49.880 --> 00:30:52.599 are objectively the most essential for the organization's 00:30:52.599 --> 00:30:56.220 long term health. If ZBB requires perfect, unassailable 00:30:56.220 --> 00:30:59.059 performance metrics to work metrics of effectiveness, 00:30:59.319 --> 00:31:01.779 efficiency and workload that are notoriously 00:31:01.779 --> 00:31:04.160 difficult to quantify and compare across diverse 00:31:04.160 --> 00:31:06.160 departments. Is the problem really the budget 00:31:06.160 --> 00:31:09.119 method itself? Or is it the underlying inherent 00:31:09.119 --> 00:31:12.539 difficulty of truly measuring value in any complex 00:31:12.539 --> 00:31:15.359 human system? That's something to think about 00:31:15.359 --> 00:31:17.720 the next time you hear a CDO promise radical 00:31:17.720 --> 00:31:19.319 zero -based cost cuts.