Mark Ritson: Why Unilever is right to adopt zero-based budgeting

I wish more marketing journalists had an MBA. Come to think of it, I wish more marketers had an MBA. Because there are moments when I look at my own discipline and their complete ignorance of marketing theory and I despair.

Mark_Ritson_full_body_a_ok

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.

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Comments
  • denysedd 27 Jan 2016 at 8:16 am

    Excellent piece Mark.
    Like you, I have sat through more marketing plans than I needed, which were a regurgitation of the previous year – plus x% for inflation! No analysis of market change “whys”, no thought of the customer behind the numbers and no real “plan” as such of how marketing will make a return on their investments. Just a simple “request” for money, expecting approval because last year’s numbers were accepted.
    This is just one more example of how Polman is leading – by far – most other CEOs in the consumer goods industry in thinking consumer first in every decision.
    I wish I was in your lectures; your MBA students don’t know how lucky they are!

  • Al King 27 Jan 2016 at 8:38 am

    Bang on mate. Did this with EA circa 2000. We had a database of costs associated with the mix. We then built up segment specific costs that achieved lo/med/hi levels of impact. So based on product sales forecast we could then plus in a budget. Came in lower than the standard run rates approach. Minds blown.

  • James Amoroso 27 Jan 2016 at 8:40 am

    Hi Mark. You are more in touch than I am with this topic as far as marketing is concerned, even if I also occasionally teach 1st year MBA students the basics of budgeting. In theory, ZBB is the only sensible way to budget. In practice, however, it takes up a huge amount of time, some of which is spent simply revisiting things that are already known and have not changed. Pragmatically, and generally speaking, I think ZBB is great to do once every couple of years, as a resetting exercise. Of course, it depends upon how fast the environment is changing. An argument can be found to do ZBB every year for marketing, given the technological pace of change. And, yes, Unilever is at the cutting edge of all things marketing, and Polman is not at all someone who engages in knee-jerk reactions! PS: I look forward to seeing at one of the CAGE* Conferences in the coming years. *(Consumer Analyst Group of Europe)

  • Mitchell Griver 27 Jan 2016 at 8:59 am

    This is a great article.
    Finance should always be willing to support marketing plans that are able to reasonably demonstrate that an appropriate return on investment can be achieved.
    The use of last years spend (plus inflation) as the basis for marketing plans generally leads to worthwhile plans being underfunded, or wasteful projects getting resources better employed elsewhere.
    Polman’s implementation of a “zero-based budgeting programme” suggests that the finance and marketing functions at Unilever seeks each other as partners, rather than adversaries.
    Definitely the way to go!

  • Andrew Boddington 27 Jan 2016 at 9:13 am

    So refreshing, so true, so well-put, this is a common-sense inversion of the tail wagging the dog. More power to those who lead with zero-based budgeting!

  • Jimmy Phillips 27 Jan 2016 at 10:40 am

    Great article, I’m fully behind this approach. just a thought though – perhaps ‘zero-based budgeting’ needs a new name? If thousands of people hear a name of something and begin to panic, rather than label these people idiots, help them by changing the name.

    • Paul Dixon 7 Feb 2016 at 9:00 pm

      Hi Jimmy

      The name isn’t ours to change! It’s an accounting term!

      I do believe that some marketers are taught this as “objective and task budgeting” which sounds less fearsome to those who are not familiar with the term.

      In this era, where marketers need credibility in the boardroom, they really do need to become more finance-capable, then they would not be fearful.

      Whilst Mark Ritson talks a lot of sense, I do consider his journalistic style to be condescending, even arrogant. Referring to fellow marketers as “brainless muppets” is not acceptable to me, even if it’s aim is to court controversy.

  • Heidi Taylor 27 Jan 2016 at 5:43 pm

    2 things: firstly I whole-heartedly agree that marketers should have an MBA; as Mark illustrates, too many marketers simply do not understand what drives and grows a business. Secondly, even if your company does not do zero-based budgeting, that doesn’t mean you can’t or shouldn’t. I’ve been doing zero-based budgeting for years, even though at the end of the planning/budgeting process I am given a number, which was probably pre-determined by Finance as in Mark’s article and which is almost always much less than what I asked for. Fine, I prioritise – with the business, based on the zero-based plan – and work with what I’ve got, inevitably doing far fewer things, but doing them better and making more of an impact.

  • JV_at_lAttitude_in_Cairns 28 Jan 2016 at 12:09 am

    Mark, as usual you speak bleeding obvious good sense, and I hope the “other 50%” will take heed. I worked in an Australian Government Commission in the early 1970’s and we practiced ZBB for ALL activities, reviewing and justifying every expenditure and dropping anything that wasn’t contributing to ROI in the knowledge that “if you always do what you’ve always done, you’ll only get what you’ve always got”
    So, keep working on your MBA knowledge-seekers and clients

  • Saku Mäihäniemi 28 Jan 2016 at 8:37 am

    Nice! I have also witnessed some interesting dynamics when a straight-line method for marketing budgets takes place. Either this budget is consumed early in the financial year knowing that it will be subject to cost cutting on the latter part of that year (without clear evidence of added value, this budget is an easy target for any cost exercise), or it will be cut when the financial year is coming to an end and marketing department is praised for their contribution to executive bonus payments. So, if you are an owner of such budget, you can chose: do I fancy a new LV bag as a Xmas present from my agency partner or a warm hug from the colleagues? Either way your integrity is put to test when budgeting process starts again for next year.

  • Teeman 28 Jan 2016 at 10:22 pm

    As a marketing professional with an MBA, I wholeheartedly agree on zero-based budgeting, and consider myself very lucky to work for an organization that understands marketing as an investment.

    We as marketers create value for ourselves—meaning personal, human resource value—by crafting smart marketing plans. We shouldn’t shy away from what is actually an opportunity to shine, not a reason to cry foul.

  • Bronwyn 29 Jan 2016 at 2:40 am

    Well said Mark Ritson. I work for a top tier company who introduced ZBB two years ago and as a result we have become more marketing led and have increased our marketing investment YOY. ZBB has changed the marketing teams mindset and as Mark points out, encouraged the team to think more strategically about what and why they are investing in a marketing activity.

  • Chris McCann 29 Jan 2016 at 10:30 am

    I think the ZBB approach has some merit, at least in how it manages marketing financial planning against ROI gain; but I’m catching a whiff of Catch 22. I spent some years in marketing agency and I witnessed first hand how ludicrously time consuming and wasteful the pitch process can be. I think the expenses associated with an increasingly rapid cycle of pitching were (and are) depressing agency finance (particularly where clients take to in-sourcing practically everything,,,). I think this is a recipe for having less talented people in that layer of UK marketing culture. Couple that with, if ZBB involves a series of agency fueled pitches every year, an uncertainty in agency staff planning and a tenuous grip on the nuances of the business they are going in to bat for, then you could end up with the ‘best marketing plan’ being a glorious creative sugar rush, but about as far from what I’d view as strategic as it’s possible to be. In the end, the holders of commercial power, those that understand true strategy and those that generate ideas to creatively fulfill strategy will all, in every case, find their uneasy alliance is the heartland of ROI success. I’m not entirely convinced that introducing annual programmatic cycling of such relationships will improve the result. But if you’re getting crap results today, it’s worth a try eh?

    One more thing, language is a subtle thing and as a CRM professional I could easily drop a term or two here that might be misinterpreted, however, I would not lambaste those misled. I’m just not sure who that would serve.

  • Zena 1 Feb 2016 at 10:54 am

    My question is why Unilever has only just started zero-based budgeting. It was included in my (ordinary – not MBA) marketing courses 20 years ago.

  • Zbiggy 2 Feb 2016 at 10:16 am

    Mark,

    Sorry dude but unlike most times re your posts I completely disagree.

    Firstly, not only should marketers not do MBA’s (Hey let’s get taught to think the same as everyone else, now that is a competitive advantage, NOT as my girls would say.) I’m not even convinced of the value of people taking a marketing degree. The greatest marketing has been developed and implemented by those that see it as an art not a science. You can’t create a masterpiece by painting by numbers.

    Secondly let’s stop trying, based on the above, to make an intangible function become supposedly tangible to impress the C-suite. As a generalist for me marketing and HR are the two most important functions of a company. Sadly both are completely undervalued because they deal with that infuriating thing called human beings. The simple reason we are the dominant species on this planet is that we have our own minds, therefore almost impossible to predict.

    So while I understand your views re ROI lets stop pretending that marketing is predictive (unless we just follow the same old, same old) and focus on the only thing that matters namely results. For me starting with a clean slate is absolutely correct but it is not a planning thing it is a doing thing.

    So I suggest the following for all the bean counters out there, look at the brands and your financial performance and allocate a budget for those teams to spend then let them get on with it. Not only will it mean that you save yourselves a load of meetings, but those teams can then rather than selling to you, get on with what they should be doing which is creative thinking to truly grow the business.

  • KirstyJBand 4 Feb 2016 at 7:56 am

    A timely article on this side of the world (NZ) where marketing budgets are currently being challenged, largely I believe, due to the inefficient use of budgets in years past and therefore companies reluctance to spend when new employees step into roles.
    ZBB does exactly what it should. Challenges marketers to hone their craft, to keep pushing their boundaries and educating themselves on where to next. The alternative approach to marketing does leave us lethargic and frustrated, but it also allows us to get away with doing an ‘ok job”. Embracing the challenge to account for our marketing investment choices would make us much savvier marketers long-term.

  • Paul Dixon 7 Feb 2016 at 9:21 pm

    I’m not convinced that marketers need an MBA in order to understand business or to master marketing theory either.

    A good understanding of business comes from working in business, ideally in a number of different businesses and in various roles and departments. Add to that continuous quality coaching / mentoring in the workplace and an opportunity to work in a strong team and with managers who can transfer skills and inspire.

    Marketing is, to a large extent, art or craft and it’s best developed over time, under careful guidance and control.

    I do believe that a professional qualification in marketing is very worthwhile and that should provide a good dose of marketing theory.

    Your articles are very informative and challenge our accepted norms, cannot have enough of this type of content, in my opinion.

    I personally do not agree with you calling members of our profession “morons” and “brainless muppets” – even if some of our peers leave a lot to be desired. I know you like to court controversy in this way but it doesn’t set a good example for others to follow. Call me old-fashioned!

  • TDJnr 31 Jan 2017 at 6:11 pm

    Provocative – the essence of a sticky article.

    “…a certain amount of investment and promise a specific return for that investment.” –

    Coming from a performance media background, it baffles me how an ROI element isn’t a prerequisite for any RTB. All for accountability. As we know, marketing is however one piece of a very complex puzzle – it isn’t black and white. Performance is subject to various micro and macro factors so for ZBB to work, it’s imperative that performance indicators are clearly defined and with non media factors considered when apprising the success of a marketing execution. Only a fair and transparent client-agency relationship can facilitate this.

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