BrazilZero-Based approach to cost management can more effectively cut costs
Companies that take clean-sheet approach to cost management can much more radically and effectively cut their costs, both in the near-term and long-term, according to research from Bain & Company.
At most organizations, the budgeting cycle typically builds on the previous budgeting period. A zero-based cost management approach however takes a radical different approach where expenses are analyzed from scratch, or a zero base, for each budgeting period, rather than relying on the previous year’s figures. The approach involves justifying every expense item and ensuring it aligns with current needs and priorities, rather than simply carrying over previous spending.
According to Bain & Company’s analysis, zero-based cost management can enable leadership teams to shrink the firm’s cost base by as much as 25%. This doesn’t only benefit the coffers – cost discipline also boosts flexibility, competitiveness, and allows for the redeployment of savings to other areas, such as boosting operating margins or spurring growth.
The company’s research describes three levels of cost management:
Benchmarking and setting targets
This is what most companies do. They figure out where they can compress costs, set top-down targets, and require the business and functional leaders to fall in line. It’s a brute-force approach to cutting costs, but the underlying work and activities don’t go away. As a result, cost reductions typically last only one or two years before creeping back.
Redesigning the work
Some organizations deploy zero-based redesign (ZBR) to reset how work is done, strengthen capabilities that provide competitive differentiation while streamlining functions that are less critical, and tap generative AI for larger productivity gains.
The challenger here is to make sure that the new ways of working stick. In practice, Bain & Company said that most organizations however fail to adopt new ways of working to change workforce behavior. As a result, the improvement in performance typically lasts three to five years before the costs return.
Embedding a cost-management mindset
The few winners that adopt this approach treat cost discipline as a strategic priority, investing in systems that align with enterprise goals. They build capabilities in people, processes, and technology to create and sustain impact. And they foster a culture of ownership and continuous improvement.
Zero-based budgeting (ZBB) plays a critical role in this mix. It creates both the skills and the ownership mindset to take costs out for good and reallocate scarce resources to their most productive use. In the words of Bain & Company, “zero-based budgeting is more than just a budgeting process; it’s a set of tools that enables a fundamental shift in a company’s overall approach to cost management, grounded in transparency, accountability, and value-focused decision making.”
“In our experience, the most effective cost managers adopt all three approaches simultaneously (at some point in their lifecycle), building knowledge and insight from each effort,” concluded Bain & Company’s researchers.
