The need to drive enterprise cost reduction and adequate levels of profitability is a constant priority for business leaders in all types of companies, especially in the fast paced new economy. Some strategies and practices work better than others. Start-ups and emerging growth companies often are managing on a shoe string budget with little room for waste. Many established companies still employ the old standby approaches, such as setting a cost reduction target of 10% across all departments and business units, with unintended consequences in the areas of customer service and employee morale. A proven best practice to strategic cost reduction involves combining Zero Based Budgeting (ZBB) and Process Improvement.
A traditional approach to building operating budgets involves taking the prior year spend and adjusting it for inflation. Although easier to implement than other budgeting models, the traditional approach builds in and compounds inefficiencies, grows the expense base over time and doesn’t encourage managers to explore ways to reduce costs via innovation and technology.