In this age of efficient growth, the “start from scratch” approach of Zero-Based Budgeting can have an incredible impact on the bottom line. A Zero-Based Budget perspective carefully evaluates not just what’s being spent, but whether a budget line item is even needed. It’s a popular strategy among CFOs for driving the budgeting cycle given the current economic environment.
To truly accelerate the impact of Zero-Based Budgeting, though, organizations should make full use of AI-powered autonomous sourcing. Doing so ensures that every new sourcing project initiated by Zero-Based Budgeting is completed at the best possible price, with the fastest possible business outcome.
Let’s unpack how these two strategies work in tandem to reduce costs and free up cash flow.
What’s zero-based budgeting?
As Gartner explains in the report “Using Zero-Based Budgeting to Rightsize Function Budgets,” business units need to move away from traditional budgeting which “tends to assume a year-on-year continuation of activity and cost.” Instead, they should leverage “zero-based budgeting (ZBB) to better align spending and resourcing with critical business priorities and outcomes.”
The report adds, “ZBB forces a thorough review of all expenses and ensures resources and expenditure allocation consider changing business needs instead of historical continuity.”
In other words, budgeting shouldn’t simply be a case of carrying over all the old vendors and expenses and then gearing up to fight for new things to add. That’s the pre-downturn way of slogging through a budgeting cycle.
Rather, every line item in the budget should start at zero. Doing so forces teams to assess the necessity of each expense, prioritizing based on value and strategic impact. The approach fosters accountability, transparency, and a continuous focus on efficiency.
Every item in a Zero-Based Budget should be examined carefully through the lens of:
- Do the budgeted items align to the company’s strategic objectives?
- Are they even needed given the constraints of the new economic environment?
- If so, are those items negotiated and purchased correctly, or can money be saved?
Gartner doesn’t recommend that every single budget cycle uses the “start from scratch” ZBB method. But in the face of current economic headwinds, it can be a high-impact approach for driving value out of every dollar.
(And it’s notable that in a ZBB exercise, driving value is actually more important in the budgeting process than simply cutting costs. You could end up adding to the budget as long as what you’re adding acts as a force multiplier upon the organization’s attempts to achieve its strategic goals.)
Autonomous sourcing is the key to zero-based budgeting
So now let’s look at the role of autonomous sourcing in the Zero-Based Budgeting process. It supports ZBB by taking full advantage of the “start from scratch” mentality to ensure that everything newly sourced (or sourced again for the new fiscal year) is done at the lowest possible cost, yet at the quickest possible speed.
Here are some ways that autonomous sourcing accomplishes this:
- Ensuring that more spend is competitively bid, thus creating price pressure.
- Conducting e-negotiations, by which fair negotiations are conducted automatically.
- Properly scoping buying specifications, which helps avoid wasteful buying.
- Improving buyer communications so proposals are more relevant and competitive.
- Accelerating data analysis to support faster and more informed decisions.
- Recommending lower cost products and services based on purchases made by other individuals at the company.
- Giving individual business units the ability to source their own goods and services, enabling them to speed up business outcomes without procurement necessarily leading the project.
How autonomous sourcing delivers instant cost savings
Let’s say a finance team decides they want to keep a quote-to-cash solution because it’s indispensable for the operations of their team. But the solution they’re using is years old, and it hasn’t been sourced, purchased, or negotiated in a long time.
Once the team decides they need the solution, they can use AI-powered autonomous procurement to:
- Save countless hours sending out bids for a quote-to-cash tool, likely keeping their current provider but also opening the door to accepting bids from brand-new vendors.
- Save countless hours analyzing proposals and bids from prospective vendors.
- Select the best suppliers for the quote-to-cash tool.
- Leverage AI-powered negotiation to bring down the costs of the best bids even further.
- Ensure that the entire paper trail has been automatically documented and kept so that future ZBB teams can review the process and achieve the same outcomes.
Repeating this step for each new or old solution in the completed Zero-Based Budget is likely to have tremendous cost savings. Every single item in the budget will have been carefully vetted for maximum cost savings while still aligning with the organization's strategic goals.
How much money can this save? For companies with billions of dollars in revenue, this process can be tantamount to hundreds of millions of dollars in costs returned to working capital and cash flow.
Zero-based budgeting + AI: The bottom line
As we’ve seen, an integral component of ZBB is the ability to ensure that everything sourced by an organization is done thoughtfully and with clear alignment to top-line business objectives. But by adding the additional power of autonomous sourcing, every sourcing project done “from scratch” will also be completed at lowest cost with the fastest business outcome.
Furthermore, by integrating seamlessly with existing legacy suites such as Coupa and SAP Ariba, an AI-powered procurement platform such as market leader Globality can ensure that every employee in a company has the power to source goods and services while staying well within accepted policies and procedures. The result is not a mere budgeting exercise; it's a strategic maneuver that can yield hundreds of millions in savings for large enterprises.
Click here for a demo of Globality’s AI-powered autonomous sourcing platform to see how it delivers 70% efficiencies and 10-20% cost savings instantly.