Raj Pherwani: How the Best Companies Approach Strategic Transformations

Pairing zero-based budgeting and zero-based redesign allows companies to boost profitability, revenue growth and employee engagement. Raj Pherwani, who leads Bain's Global Performance Improvement practice, discusses how companies can achieve the zero-based budgeting trifecta during a transformation.

Read the Bain Brief: Betting on Zero-Based Budgeting's Trifecta

Read the transcript below.

RAJ PHERWANI: The best companies in the world are always focused on their cost position. They are ruthless in ensuring that they're operating at the optimal level of efficiency relative to the industry and their scale. This focus on cost endures through good times and through bad times.

Companies that focus on cost only in bad times eventually pay the price. This strategic focus on cost by the best organizations allows them to invest in themselves, to invest in their strategic position, to invest in their customers and in their employees. This allows them to stay ahead of the game at all times.

Periodically, even the best companies have to go through strategic transformations. And a relentless focus on cost at all times allows them to fund these strategic transformations, which inevitably require massive amounts of investment.

The best companies also do not talk about cost. They talk about improving themselves. They talk about aspirational goals, such as creating the next generation of their organization. And this actually allows for a superior level of employee engagement.

Even companies that are focused on cost find that there are situations where cost creeps back into the business. It actually takes a lot of discipline to keep cost out.

One of the tools that's been gaining a lot of traction in recent years is zero-based budgeting. Zero-based budgeting has actually been very popular and highly utilized in the consumer products industry for several decades. It's been gaining traction over the last few years across industries.

What we find is that probably less than 50% of companies that utilize zero-based budgeting actually achieve the results that they desire. Taking the right approach is critical. Zero-based budgeting is about creating organizational alignment, about creating employee engagement and about creating behavior change.

We often pair ZBB with a tool called zero-based redesign. Zero-based redesign enables companies to create organizational simplification. It allows organizations to focus on the most value-creating activities and eliminate the unnecessary ones.

Pairing ZBB with zero-based redesign allows companies to actually achieve much higher profitability growth, much higher revenue growth and greater employee engagement. We call this the zero-based budgeting trifecta.

Read the Bain Brief: Betting on Zero-Based Budgeting's Trifecta