Zero hero: savings with zero based budgeting

 

By Stephen Fitzgerald
In their recent report, The Financial Sustainability of Local Authorities 2014,  the National Audit Office tells us that central support for local government has reduced by a 37% reduction in funding between 2010/11 to 2015/16.

This is at a time when spending pressures are increasing. For example the increase in children’s social care spending in England as a whole over the four year period from 2010/11 is 7%.  There is no other sector in British corporate life that has faced a financial and operational challenge of this magnitude.

Nevertheless, local government has improved customer satisfaction ratings, built up reserves and kept local taxes down.  However, things are becoming tough and – even if one does not believe the Cassandras that talk of imminent service collapse in service and financial health – there is little doubt that local government faces a challenge in budget management that surpasses that of most other organisations.

The days of tax and spend are over and the question is how, in the post transformational age, remodelled services can continue to be appropriately resourced.  It is against this challenge that local authorities are examining their budget processes to see how they can continue to deliver for the long term.

One approach born in the public sector is zero based budgeting (ZBB).  Going back to the last century it was developed to provide an approach in the US public sector that was an alternative to taking the replication of past spending with incremental changes as a way of building budgets.  This article considers how ZBB might be applied in a local authority context.

ZBB is an approach to planning and decision-making that reverses the working process of traditional budgeting.  In zero-based budgeting, every line item of the budget must be scrutinised, evaluated and driven by objective data.  Its key elements are that it does not use historical cost information; involves a comprehensive analysis of each service area; uses objective performance measures; engages managers at all levels in budget development and aims to deliver an efficient allocation of resources.

In setting a budget the organisation needs to ask a number of searching questions:

• Is the activity really necessary?
• What happens if the activity ceases?
• Is the current level of provision adequate?
• What other ways are there of carrying out the activity?
• How much should the activity cost?
• Do the benefits to be gained from the activity at least match the costs?

There are a multitude of potential positive outcomes. Inefficient and obsolete activities are removed, and unproductive spending is limited. For ZBB to be used in practice a bottom-up approach to budgeting has to be employed and this, in turn, facilitates the engagement of employees. The zero based approach also challenges the status quo, and encourages a questioning attitude among managers. Moreover, it responds to changes in the business environment.

However, there are also are some potentially negative issues. It can be resource intensive, absorbing significant time and planning. It requires considerable scrutiny of output data and can be seen as threatening to an established order. It may also result in uncertainty about the costs and resources of options.

Does this approach have an application in the UK public sector and for local authorities in particular? Well, already a number of local authorities are laying claim to adopting this approach and delivering improved budget outcomes for service areas. In December 2014 the New Local Government Network published its report Smart Budgeting, Integrating Financial and Strategic Planning for Outcomes.  This included a case study of East Hants and Havant District Council’s where they introduced a widespread ZBB approach that has already delivered significant budget savings.

There can be little doubt that given the magnitude of savings that local authorities face the incremental approach will not be sophisticated enough to deal with the scale of challenges that are being faced.  ZBB can provide a framework to actively challenge the budgetary status quo and develop a financial approach that links properly to the needs of services in the twenty first century.

The challenge for the finance professional is to address this new approach and achieve a positive outcome for organisations.  Purely adding another level of bureaucratic process will not be positively received by the internal customer.  ZBB, if it is to be a technique that attracts a wider use, must be simple and customer focused. Delivered effectively ZBB presents the opportunity to reach budget allocations on objective data as opposed to historical custom and practice.  This has to be an objective worth striving for.  So, for local authorities facing hard budget decisions, ZBB is an essential part of the financial management toolkit.

Stephen Fitzgerald is a management and financial consultant working in the local authority sector.

 

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