Take last week as an example. Unilever’s CEO Paul Polman announced that his company would approach the new planning year with a “zero-based budgeting programme”. The marketing mediascape instantly went bonkers. Reports in the marketing press described the approach as a “belt-tightening move” and proof of “tougher cost controls” at Unilever. On Twitter an army of under-trained, over-loud marketing morons bemoaned the move as being “recessionary planning”, “cost cutting” and “causing agency panic”.
All total bollocks. I know it has ‘zero’ in the title but if you can take stock for a moment and not form an opinion in half a second, you might be surprised at what zero-based budgeting actually entails and why Unilever has committed to it.
MBA students, for their sins, get taught about zero-based budgeting as part of their 12 week marketing core course and again, usually, in their marketing communications or brand management electives. A professor like me turns up and explains why the traditional advertising to sales ratio approach used by 95% of companies is strategically stupid. They then explain the superiority of the zero base approach using the work of Pete Pyhrr and the late, great Simon Broadbent. Then, if you are a more applied professor like me, you walk the class through your experiences introducing the method to multibillion-dollar international corporations. I know it’s not a degree in history from Oxford, but you can see the merits of this form of education.
To understand the advantage of zero-based budgeting you first have to appreciate the brain-numbing ridiculousness of the way most marketing budgets are set. First, a finance executive with no marketing training and no knowledge of your market looks at the five-year revenue growth of your brand. They extrapolate the sales line using an arbitrary compound annual growth rate calculation and come up with an expected sales goal for the upcoming year. Then they take an entirely arbitrary percentage of a sales figure – usually varying somewhere between 1% and 10% – and they apply this proportion to the expected revenue number. This budget is then confirmed to the marketing team who pass on the good/bad news to their agency partners about how much money they have for the year ahead. Usually over cocktails.
There is so much wrong with that last paragraph I do not know where to start. The finance executive has no insight into market dynamics. If the company already knows what its revenues will be next year prior to marketing planning, why bother with marketing at all? How come marketing is seen as a cost not an investment in the business? Where does the arbitrary percentage figure come from? Why not encourage all your agencies to re-pitch for your business based on your new annual plan?
The zero base approach is not a cost cutting method or belt-tightening approach. It’s just a better, more strategic way to plan your marketing. First you forget about the total spend and where that spend was allocated last year – hence the zero. Second, the marketing team do their research, construct their marketing plan and conclude it with a budget in which they ask for a certain amount of investment and promise a specific return for that investment. Senior management review the plan and either grant the amount or push back and ask the the team to make changes.
In reality, what happens is that senior managers bet their resources on the better marketers with the better plans and the better opportunities and reduce investment in the crappy marketers with crappy plans. The strategic approach, in other words. If you get your requested investment you then have to provide the promised financial return at the end of the year or your ass will be delivered on a tray. Accountability I believe it’s called.
In my consulting life I have sat through more than 1,000 marketing plans. Approximately half were set using a pre-allocated percentage of sales, the other half using a zero base approach. There is no comparison. The former encourages lethargy and lazy agency relationships, the latter is strategically invigorating and impels marketing improvements.
The reason why Unilever is embracing the approach has nothing to do with recession or cost cutting. They are doing it because they are an awesome marketing company and, unlike the vast army of muppets who populate our discipline, they know what they are doing.
The real question is not why Unilever is introducing zero-based budgeting but why most marketers reading this column will blindly accept a pre-allocated cost set by their finance department using an arbitrary calculation as the base for all their efforts for the year ahead. I say again, muppets.