Zero-Base Budgeting

Zero-Base Budgeting An Overview

Background and Nature of Zero-Base Budgeting

Zero-Base Budgeting (ZBB) was first developed and introduced for business by Peter A. Pyhrr. During the development of ZBB Mr. Pyhrr was the Manager, Staff Control, at Texas Instruments, Inc. Dallas. From this beginning ZBB has been explored and adopted by many other businesses. Some state and federal government departments have adopted and put into practice the management concepts of ZBB. The Association of School Business Officials International sponsored a series of workshops in Canada and the United States designed to assist school business officials to understand the concepts and principles of Zer0-Base Budgeting. The presenters at these workshops were Dr. Sam W. Bliss, Dr. William H. Curtis and Mr. Peter Pyhrr. These workshops and the desire of many superintendents and school business officials to improve budget management lead to the adaptation and use of the ZBB model in their districts.

Major Processes of Zero-Base Budgeting

The development and implementation of the ZBB model requires managers and others in the organization to engage in several major planning, analytic and decision-making processes. These major processes of ZBB include the following:

Definition of the Mission and Goals of the Organization

Usually the organization has already established mission and goal statements. However, it may be necessary to redefine the ones that are already in existence and/or create new ones. This redefinition is particularly useful when there have been major changes in the internal and external environment.

Identification of the Organization's Decision Units and Decision Packages

A ZBB decision unit is an operating division for which decision packages are to be developed and analyzed. It can also be described as a cost or a budget center. Managers of each decision unit are responsible for developing a description of each program to be operated in the next fiscal year or years. In ZBB these programs are referred to as decision packages and each decision package usually will have three or more alternative ways of achieving the decision package's objectives. Briefly, each decision package alternative must contain, as a minimum, goals and/or objectives, activities, resources and their dollar costs. Also, the decision package should contain a description of how it contributes to the mission and goals of the organization.

Analysis of Each Decision Package

This analytic process allows the manager of the decision package and its alternatives to assess and justify its operation. Several questions should be asked and answered during the analytical process.

Does this decision package support and contribute to the goals of the organization?

What would be the result to the organization if the decision package is eliminated?

Can this decision package's objectives be accomplished more effectively and/or efficiently? This question will require creative planning by the person or persons developing the decision package.

Ranking of Decision Packages

The ranking process is used to establish a rank priority of decision packages within the organization. During the ranking process managers and their staff will analyze each of the several decision package alternatives. The analysis allows the manager to select the one alternative that has the greatest potential for achieving the objectives of the decision package. Ranking is a way of evaluating all decision packages in relation to each other. Since, there are any number of ways to rank decision packages managers will no doubt employ various methods of ranking. The main point is that the ranking of decision packages is an important process of ZBB.

Acceptance and Allocation of Resources

Managers, following a review and analysis of all decision packages, will determine the level of resources to be allocated to each decision package. Managers at different levels of responsibility in the organization usually perform the review and analysis. Sometimes, the executive levels of management may require the managers of the decision packages to revise and resubmit their decision packages for additional review and analysis.

Budget Preparation

The organization's budget is prepared following the acceptance and approval of the decision packages. Once the organization's budget has been approved managers of the decision units will place in operation all approved decision packages during the next fiscal year.

Monitoring and Evaluation

The last major process of ZBB is monitoring and evaluation. The processes of planning, analysis, selection and budgeting of decision packages prepares the organization for operation during the next year. However, what managers plan to happen in the next fiscal year may or may not occur. Adjustments may be essential during the year in order to achieve the decision package objectives. Also, there is a need to know whether or not the organization did accomplish what it set out to achieve and what level of achievement was obtained. The monitoring and evaluation process of ZBB requires that the following be included in the overall design and implementation of decision packages.

Decision package content should include:

Measurable performance objectives

Appropriate activities as means for achieving the performance objectives

Resource allocation essential for conducting the activities

Methods for carrying out the activities as planned

Evaluation of objective achievement during and at the end of the program of activities

Procedures for reporting objective achievement to managers of the organization

The Importance of Planning

A major planning effort is required by personnel of an organization when installing ZBB. It is through the planning process that important guidelines and directions are provided for the development and ranking of the decision packages. Also, the planning process enables managers to prepare for the uncertainty of the future. Long-range planning allows managers to consider the potential consequences of current decisions over an extended time period.

The common components of the planning process are:

Development of the organization's mission and goals
Generation of broad policies to guide and direct the organization
Establishing and documenting the client or customer needs
Preparation of decision unit goals and/or objectives
Creating a set of organization priorities
Resource identification
Decision package analysis, resource allocation and selection
Budget preparation

Adherence to concepts and procedures of ZBB will result in the following:

Retention of desirable decision packages (including modification as may be necessary)

Elimination of obsolete, non-relevant decision packages

Increased or decreased levels of funding for some decision packages

Addition of new decision packages

The ZBB planning process eliminates one of the major disadvantages of most traditional management and budgeting systems. Typically, in the traditional budgeting system planners focus on the incremental cost increases from year to year. ZBB overcomes this traditional budgeting weakness by subjecting all proposed programs and expenditures to the type of scrutiny that is normally conducted for new programs. The comprehensive resource cost analysis process is a strong internal planning characteristic of ZBB.

Summary

ZBB addresses and supports comprehensive planning, shared decision-making, the development and application of strategies and allocation of resources as a way of achieving established goals and objectives. In addition, ZBB supports the added processes of monitoring and evaluation. ZBB when properly implemented in an organization can assist managers to:

Develop and/or modify their organization's mission and goals
Establish broad policies based on the mission and goals
Efficiently identify the most desirable programs to be placed in operation
Allocate the appropriate level of resources to each program
Monitor and evaluate each program during and at the end of its operation
Report the effectiveness of each program

ZBB, when properly implemented provides personnel of an organization to plan and make decisions about the most efficient and effective ways to use their available resources to achieve their defined mission, goals and objectives.

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