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I have worked in a 'Zero based' budgetting system and while the name sounds wonderful and the perspective of 'zero' increase satisfies the pundents does it really work? In other words, 'zero' is really not 'zero' it truly is a negative! For example, and this is one small example, factor in the cost of living and in 'zerto based' budgetting you end up with a minus growth. Factor in interest payments which in business are often a reality, factor in depreciation, etc. etc. and these are not considered in zero-based budgeting. In the long run one gets in fact a serious decline in the ability to offer services and do business in a competitve markety place. Although it is a nice sounding philosophy - in it's truest context it has many weaknesses - I have been there and I am aware of the down side.
Rennie,
I think you may misunderstand what they mean by "zero-based budgeting" in this case. It doesn’t mean zero percent increases but rather starting each year with an absolute clean slate. No funding would be considered sacrosanct from year to year. Each program has to sell itself each year. Needless to say it is better in principal than in practice. Realistically we aren’t going to require that the chief of police or fire chief has to come to council to argue for the existence of their service but that is how the theory works. In theory each would have to make a case first for the existence of the service and then for the service level. It could actually mean they argue for an increase of funding over the previous year.
As you can imagine, the problems with “zero-based budgeting” are related to its strength. If the head of the road crew has to make a business case for every penny of his budget every year he may not be as able to create an empire and costs could go down. Similarly, it allows councils to identify areas where spending has been happening by inertia and history (i.e grants etc..) or where funding is no longer efficient or necessary. But as a negative a HUGE amount of administrative time is wasted because every dime on every project has to be accounted for. Imagine a scenario where you are given a detailed audit every year! You can get to a situation where you spend a dollar in administrative costs to save a dime in operating costs. More importantly, zero-based budgeting doesn’t acknowledge that employees are on permanent contracts and that Municipalities have fixed costs (pensions, etc..) thus you can never really start at zero because the fixed costs will go from year to year. As a one-time affair for someone in financial trouble (to find where your money is going) it is a great idea, as an on-going year-to-year process it has the makings of a morale-destroying administrative nightmare
Blair is correct about zero based budgetting. What is so wrong in justifying every department's expenditures before finalizing the budget. Private corporations essentially do the same each year and have to justify them line by line. In fact senior department managers in the corporate world know this is coming each year and track & monitor their revenues & spending to streamline their year end zero based budgeting justification process.
In fact in many corporations at once monthly senior managers meetings they powerpoint report and discuss variances, opportunities and deviations on their spending and revenues with actual to budget for each month and year to date with an executive questioning panel including executive accountants.
LFP,
We are close to agreeing but not quite there. In the private sector most companies don’t go to zero-based budgeting but as you describe they have to justify their budgets...there is a big difference between the two. Justifying your budget just involves demonstrating that you are getting a good return on investment within your department or business unit. Revenues and spending are tracked but the detailed work required for full zero-based budgeting is not seen. The difference is in the level of detail in the budgeting process. I had the bad luck to be involved in the process while working at UVic (they tried it one year in conjunction with a plan to reallocate resources when a new VP was hired) and saw how much time and effort was spent trying to break out and justify all costs. It was a useful exercise in that lots of waste was exposed and eliminated but not one I would wish on any individual more than once or twice a decade (it takes time for wasteful spending practices to build up). By the end morale was down to zero and employees felt like they were being treated as liabilities rather than assets. As for waste, within our department, my old supervisor indicated that he had to allocate 10% of his administrative budget to deal with the process and as our department was already running a tight ship the cost savings didn’t come close to making up for the administrative costs.
Commenting by HaloScan
