Jenny Chan 陳詠欣
Apr 13, 2018

Zero or hero? Industry polarised on zero-based budgeting

Clients see it as fiscal discipline. Agencies see it as short-sightedness. As zero-based budgeting makes a comeback, we assess its values and shortcomings.

Zero or hero? Industry polarised on zero-based budgeting

“2017 for us was not a pretty year, with flat like-for-like, top-line growth,” summarised Martin Sorrell on WPP’s performance in early March, before news of his abrupt resignation broke on 15 April. He placed the blame in part on the parsimony of zero-based budgeters, alongside activist investors, private equity and the impact of technological disruption.

This comic below of a difficult conversation between marketer and CEO fits well with the current imperative around belt-tightening, with such scenes quite likely playing out in boardrooms across the industry.

“I thought you said you can do this campaign on a budget.”
“I didn’t say it was a small budget.”

It may be justified for agencies to treat zero-based budgeting (ZBB) with caution—or be against it—even if some are not as vocal as Sorrell. The CEO of WPP has been debating against what he sees as an arbitrary cost-control method since 2014.

Why? Zero-based budgeting (the practice of setting a budget from scratch and evaluating the necessity of every single dollar instead of taking last year’s as a base), is usually perceived as a method of axing costs for the sake of it, although management consultants would argue otherwise. "ZBB is about both reducing costs and improving performance," says Deepak Jain, a partner in Bain & Company's New Delhi office. "ZBB is to ensure to institutionalize the process of looking at costs in a bottom-up manner – ZBB thus helps in ensuring that inefficiencies don’t creep back in."

ZBB certainly generates more work, and worries, for agencies, however. Given that many do not charge marketers for pitching, scoping or costing work, zero-based budgeting puts more strain on their resources, which are already under pressure from trying to deal with disruptors in the industry, says Paul Davies, Asia Pacific managing partner at The Observatory International.

There's also a prevailing perception in adland that no client ever increased budgets when zero-based budgeting dictated it: they only ever decrease.

“I think this is a discussion that needs to happen upfront between the client and the agency, to at least make it an option that budgets might increase,” says Shann Biglione, chief strategy officer for business transformation at Publicis Media Greater China.

Creatives can’t directly prove the results of their creativity, that’s why they don’t like it

Campaign Asia-Pacific had plenty of rejections to requests for interviews for this article. It seems that taking a stand in favour of zero-based budgeting in marketing is the “death knell”, because coming up with creative briefs is so resource-straining and time-consuming. Speaking out against the practice, however, risks clients assuming the agency is only interested in expending energy on creativity, instead of visibility on actual ad spend or measurability of conversion.

Zero-based budgeting, effectively, has at its heart the question of how you measure the impact of creativity.

“Creatives can’t directly prove the results of their creativity, that’s why they don’t like it,” says Darren Woolley, CEO of TrinityP3. “Plus, you don’t really know whether a creative idea will work out until you run it.”

Pepsi’s Kendall Jenner ad from last year is a case in point: the ad got pulled after it was slated for clumsily co-opting protest movements, particularly Black Lives Matter, for its own creative gain last year.

That ad aside, PepsiCo CEO Indra Nooyi has in the past eschewed zero-based budgeting, explaining that “a program that cuts to the bone jeopardises your ability to grow the top line”.

At the same time, other CPG and FMCG giants, like Kellogg's, P&G, L’Oréal, Kraft Heinz and Mondelez have found that zero-based budgeting works for them. Diageo’s ‘Catalyst’ tool, used to analyse internal and external data, has improved the allocation of its advertising and promotional spend, according to the ACCA in a report tracking the recent comeback of zero-based budgeting. Unilever's brand and marketing expenses in 2017 decreased by €0.3 billion (down by 0.4 percentage points), "reflecting the impact of efficiencies from zero-based budgeting initiatives".

Historically, it has been the bigger advertisers with stricter approaches to media planning who have used zero-based budgeting to control their discretionary costs. “For it to work, you need shared assumptions and validations, and so we tend to see it being implemented in more framework-based brands,” says Biglione.

Woolley, additionally, notices a handful of telco and financial brands also starting to consider ZBB “because they’ve heard about the money saved by CPG brands”.

In 2017, Deloitte surveyed 299 companies in China, India, Japan, Australia, Hong Kong and Singapore, which together comprise 89% of the Asia Pacific economy based on gross domestic product (GDP). It revealed that respondents from China and Singapore expect to increase their use of ZBB over the next 24 months, with Chinese brands expecting the largest increase, from 14% in the past to 21% by June 2019.

Source: Deloitte's 'cost improvement practices and trends in Asia Pacific' survey 2017

They have good reason to do this, comments Jeff Stewart, managing director at market information consultancy Asia Market Development. “Chinese companies saw the glamour in huge digital campaigns with expensive KOLs on WeChat and Weibo, but not necessarily the sales.” The enormous amounts of money spent on those campaigns brought in lots of social media activity, but the companies fretted when conversion rates were low and then hurried to slash costs, says Stewart.

“[WeChat and Weibo] are just a piece of the marketing mix. That’s what companies in China forget sometimes. Awareness is one thing, driving conversions and repeat purchases are another—much more complex—thing." ‘Likes’ never reflect sales, he stresses.

“If I’m a senior global exec sitting at HQ with my shareholders betting on my China sales forecast, I could care less how many people liked our WeChat campaigns. And my over-bloated advertising agency isn’t going to be able to tell me why, if the forecast is missed, despite all the money spent. That’s when ZBB becomes important,” says Stewart. He is currently working on bringing a foreign publicly-traded company into China, for example, and says he made the decision not to use the globally-aligned ad agency but a local, on-the-ground equivalent that could move faster with ZBB metrics.

Plenty of other examples exist of the value of ZBB from the brands' perspective. When prospects for the processed food industry started going south a few years ago as Chinese buying behaviour shifted to homemade and natural food, Kraft Heinz China’s zero-based budgeting policy, newly-implemented back in 2014, started to turn things around for the company.

“For upper-funnel activities (like market research, product development, packaging, branding) that are less transactional and more image-building without clear KPIs, we still needed the marketing team to illustrate where they are spending the money and demonstrate potential results to be generated from the spending,” says Jonathan Cheng, head of zero-based budgeting for Greater China at Kraft Heinz.

The perception of zero-based budgeting being about abitrary cost cuts is “wrong” in Cheng’s eyes. “A lot of people freak out, but I don’t think they have to. I really want to voice that ZBB is not about pure cost-cutting in an extreme way, but about investing money in a fairer way.” In fact, zero-based budgeting itself incurs unexpected costs, he states.

"I really want to voice out that ZBB is not about pure cost-cutting in an extreme way, but about investing money in a fairer way.”

Critics may also be surprised to hear that the firm’s marketing budget actually increased year-over-year, according to Cheng, so as “to support Kraft Heinz’s business growth in China”. Zero-based budgeting was the biggest contributor to the firm’s EBITDA in 2017, which was an “epic” year, says Cheng.

Of the savings made from implementing ZBB, “just a small chunk” came out of agency-related billings, he reveals.

Zero-based budgeting is related to budgets that are not existing and not allocated yet, adds Stewart. It’s a measure meant to better align with corporate strategy. “It's not a new thing. And it shouldn’t be taken out of context as a restrictive measure to cut ad spend. It’s meant to optimize it. The money is still there to allocate.”

While it may not be right for all types of companies, the benefits far outweigh any negatives, Davies agrees. Done well, ZBB provides a marketing budget that is robust, justifiable, and defendable to requests for reductions, he says, because it firstly detects wasteful expenditure, and then ensures funds go only to growth areas.

Biglione also hopes that ZBB could help balance the constant 'rolling reforecasting' of budgets. Bain & Company's Jain explains the difference: "A rolling reforecasting is done at a pre-defined frequency based on the most recent trends (largely top-down projections). While ZBB is done using the first principles, i.e. analyze the key drivers behind each cost item, project how they are expected to move in future (linked to overall strategic priorities) and build up the budget in a bottom-up manner."

If marketers can master this, one big pro is the shift of power towards the CMO and away from the CFO, whose approach to budgeting can often be quite “crude”, says Biglione.

The reality is that most complex, long-term ROI measures rely on approximate models, and the longer the term of return the harder it is to predict, whether because of a lack of data or because the models are simply not reliable. Biglione is paying more attention to the work done by the IPA [such as this 'The Long and the Short of It' report] or Ehrenberg Bass. “They may not have all the answers, but I do believe they help validate the investment dimension of the marketing spend equation.”

Imagine an ad tagline saying: “These 30 seconds of silence are brought to you by the brand and its management consultant, courtesy of its zero-based budgeting process.”

It's unclear if such work will help all big ad agencies in their tug of war with zero-based budgeters. Woolley thinks critics like Martin Sorrell are simply using ZBB as an excuse for dropping revenue. A lot of marketers realise that traditional advertising is difficult to prove performance in the ZBB system, he says, so they move budgets into things like retail marketing, shopper activation and other below-the-line activities.

Siewping Lim, Asia CEO of TCC Global, is one beneficiary of this. “Retail marketing and shopper activation have in the past been relegated to the backseat as front-end advertising and media took the credit—and budget. But with the proliferation of consumer choices and technology enabling greater innovation, the battleground is shifting to the last mile, where measurement and attributability are much stronger."

Of course, the slimming of agency fees is not a direct result of zero-based budgeting. There are a much wider range of factors involved, from lack of transparency and commoditisation to unhealthy pitching practices. It would be “disingenuous for agencies to pretend it’s the heart of the issue”, says Biglione.

“Zero-based budgeting could save marketing and advertising,” says Woolley, but only if agencies stop rejecting it rather than “owning it and taking control.”

TUG OF WAR BETWEEN MANAGEMENT AND MARKETING CONSULTANTS?

One other reason for polarising views in the boardroom: Zero-based budgeting is often implemented by management consultants who sell it to the CEOs and CFOs based simply on marketing budget reductions. That’s the trouble, explain TrinityP3 CEO Darren Woolley.

When they put it in that [reduction] context, of course, marketers and agencies resist. They don’t want to get it reduced to what it is—a ‘budget’. But to marketers, it is an ‘estimate’.

In the past two years, we’ve seen management consultants apply performance formulas and predictive modelling based on sales—but not based on actual marketing data—to the marketing budget.

ZBB was never designed to reduce the marketing budget, only to ensure the marketing budget was spent effectively. But their way of implementation has basically turned advertising into a sales report function rather than a brand-building function.

For marketing consultants, the conversation has to be broader than just immediate sales. We’re investing in marketing; we need to look at the medium- to long-term. CMOs are engaging with us so that they can talk to their CFOs about what are the metrics to be measured. Most management consultants and CFOs approach things from the accounting point of view, not marketing. The reverse is true. Most CMOs don’t know enough about financial planning too.

The assumptions of zero-based budgeting are the opposite: sales-only. Reducing non-effective spending that doesn’t bring sales is not a bad thing. But the problem is how management consultants classify things in ‘working’ and ‘non-working’ investments. ‘Working’ can be media, for example, and ‘non-working’ can be production and creative expenditure.

We see this all the time. Management consultants say to us: “Oh, your ‘working’ to ‘non-working’ ratio is too high currently at 15, should be at 8.” A common occurrence is that they trim only the ‘non-working’ outlay.

When creative work is placed as a line item as ‘non-working’ investment, it is made to seem like it’s not effective. But what’s the point of media if you have no creative content to support?

Imagine an ad tagline saying: “These 30 seconds of silence are brought to you by the brand and its management consultant, courtesy of its zero-based budgeting process.”

Marketers do a lot of activities that are not actually performance-focused, but for corporate branding reasons. Apart from the hard metrics like current sales, there’s a whole range of softer, longer-term metrics: brand perception, consideration, and intention to purchase. If you can get a correlation between all those, then you get a more accurate predictive model of future returns.

Say, you’re trying to sell mattresses. There’re only so many people in a certain market that’s going to buy a mattress in any given month. If during that month a competitor comes up with a discount, your conversion rate may drop from a hoped-for 6% to 3%, for instance. But if you’re investing in brand building month after month, when people are ready, the residual perception of your efforts will lead them to buy.

The work marketers should be doing now is to show proof of concept of marketing ROI to their bosses, because management consultants have been doing that on their end. Only after they do that, like actually achieve acquisition of half a million new customers, zero-based budgeting can provide marketers more money.

The key question for the next brand that wants to use zero-based budgeting: are you doing it to reduce marketing costs (short-term gig)? Or improve marketing performance (long-term game). These are two different approaches.

 

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