Another Look at Zero-Based Budgeting.

• Position: News & Numbers - Survey

The public and private sectors share a need for sustainable cost-reduction programs, which some organizations can meet with zero-based budgeting, McKinsey reports. The firm's research on private-sector firms found that just 26 percent were able to sustain cost reductions over four years. A survey found that cuts backfired and hurt growth instead of helping, and that the cost programs were abandoned once the budget got less tight--all of which made cost cutting more difficult the next time. The situation isn't much different for governments.

A potential fix is zero-based budgeting, which can function as "a sort of cost reset button" that, done correctly, can create sustained when change --something that cuts can't do. An enterprise-wide effort is needed to make zero-based budgeting work: "the whole organization, working with finance, thinking in much the same way, making decisions as if they were owners of the business as a whole."

Of course, doing zero-based budgeting correctly isn't easy. The process is extremely time consuming. McKinsey studied the success stories--"how they sustained a culture in which cost trade-offs became a way of life rather than a periodic event." There were a few commonalities, including the following:

* Shoot for major reductions. "Companies that achieved 20 percent reductions in year one were four times as likely to succeed."

* Include every area of the organization...