Once a process is established, it is rarely questioned. So it ties up capital even when it could be replaced by new solutions. Mathias Gehrckens and Ayse Engel of Accenture explain how companies are identifying and solving this with the zero-based mindset.
Mathias Gehrckens is managing director of retail and consumer goods at Accenture Germany and co-founder of dgroup, part of the global Accenture network.
New, digital technologies continue to dramatically accelerate changes in the business world. To keep pace, companies in Germany need to release tied-up capital that does not make a clear contribution to the realization of their business strategy in favor of their future growth targets.Four approaches to ZBx – or zero-based mindset – give companies completely new insights into their profitability.
"Yes, I sleep exactly from 23.15 to 6 a.m." Gerry Weber chief executive Johannes Ehling's answer in a December 2018 interview when asked if he could still sleep well sounds confident. However, the reality paints a bleak picture. After years of declining margins, his company had just filed for insolvency at the Bielefeld district court.
The case of Gerry Weber is emblematic of the rapidly changing retail landscape. The classic big players in stationary retail see their market shares threatened by online business models. Multichannel strategies and digital store infrastructure are driving competitive complexity and generating margin prere. A rethink is also taking place on the market side. The empowered customer expects a personalized experience with product suggestions and services tailored to their individual needs, which they can compare in real time and which are best delivered the same day. The physical and digital shopping worlds are increasingly merging, and those who don't follow suit will be left behind.
Fashion market giants such as Esprit or Tom Tailor are not doing much better than Gerry Weber. The dilemma: Prere on margins ties up investment capital and prevents the financing of a digital transformation. This results in a lack of growth prospects, which increases vulnerability to disruption and in turn increases prere on margins. To break this vicious circle, cost reduction programs are implemented, but they rarely eliminate the underlying problems and are therefore usually not sustainable.
The Zero-Based Mindset (ZBX) is a solution that promises to reorganize the cost structure and free up money for growth – a solution that cleans up the management and budgeting mistakes of the past and rigorously scrutinizes cost and investment measures. The question now is whether retailers can sustainably implement technological, structural and personnel change necessities with the ZBX methodology.
Why traditional cost reduction programs aren't working
Many retailers firmly believe that cost reduction is in their DNA and follow up financial problem diagnostics with enterprise-wide cost reduction therapy. But the classic "remedies" no longer work in an age of constantly changing cost structures. Particularly due to the technological evolution, certain cost drivers are decreasing drastically, while others are increasing by leaps and bounds. However, conventional budgeting and control methods derive future budgets, key performance indicators and strategies on the basis of the status quo and thus only allow a look in a rearview mirror.
Management often fails to achieve a long-term vision and to integrate the programs into the corporate culture. According to Accenture Strategy Research, only 51 percent of all respondents sustain cost savings for one to two years. This suggests that traditional cost transformation programs are not sustainable. Instead, a projection lens is needed that challenges the status quo and brings current and future developments into sharper focus.
Zero-based mindset as a sustainable answer
ZBx – the "zero-based" mindset – looks at companies in an unbiased and unprejudiced way from a new point of view. After each budget cycle, all budgets are zeroed out and rebuilt from scratch instead of using last year's numbers. Every expense is scrutinized. The Zero-Based-Mindset thus avoids the extrapolation of misallocations into the future. It also explicitly considers how changes on the market side – such as customer expectations – affect costs.
Thus, ZBx brings a "smart spend" mentality to the overall cost structure and operating models to reallocate costs and simplify complexity. The basis of this approach is the need to justify every euro spent in order to focus on transparency and accountability. The cost reduction reflects one of several essential factors of the ZBx mentality. Overall, it is a holistic approach that unlocks "investment capital" for growth and transformation. Basically, four core competencies can be defined, which are decisive in the implementation of the approach.
The four building blocks of the ZBx mentality
Zero-Based-Spend (ZBS) Identifies indirect, non-personnel overhead costs of insignificant strategic importance through granular cost analysis. It enables management to make non-value-added cost items in overhead transparent and to change management's cost culture through open discussion.
ZBS no longer follows the old top-down logic of costs as a percentage of store sales or focusing on store contribution margins. Instead, ZBS aims at a bottom-up driven reallocation of costs. This approach avoids all behavioral patterns in which existing budgets are still quickly utilized at the end of the year, regardless of how they contribute to the company's success.
Zero-Based-Organization (ZBO) Shapes organizational structures from the ground up and shifts resources toward functions that are essential to survive in the future. Organization, capabilities and resources do not necessarily correspond to those that were responsible for past success.
Too many retailers today still operate in functional or geographic silos. As a result, cost decisions are often made in isolation. A common example is IT costs, which often sit not only in IT but also in the business units. This leads to the fact that both capabilities and costs are often not recorded centrally in a transparent way.
Zero-Based Commercial (ZBC) Optimizes marketing, sales, customer service and pricing to better address individual consumer behaviors. Bottom-up visibility allows ZBx to identify optimization potential in the marketing mix. Especially in the areas of store marketing (point-of-sale marketing, promotions) as well as branding (PR, influencers, events) and market research, levers for savings and growth potential can often be identified.
Zero-Based-Supply-Chain (ZBSC) determines the target cost of materials and identifies cost reduction potential using three levers: price, performance and quality control. Along a closed-loop process, product and service complexity are also optimized.
On the back-end side, "cross-channel supply chain management" is critical, d. h. the cross-channel optimization of supply chain structures and flows of goods, the logical end-to-end integration of inventories, and the support of merchandise planning, control and logistics by intelligent decision-support systems.
How ZBx becomes a success story: Create transparency and comparability in cost categories
In-depth competitive analysis and benchmarking form the foundation of the ZBx approach. The first step in this process is the uniform and transparent definition of cost categories. It is crucial that comparability is ensured both internally and externally.
On this basis, cost categories can be subjected to the 0-based stress test. To address this, Accenture has built an extensive database of industry-specific metrics by cost category. The performance of the customer can be determined in this by means of percentile values. These serve to reveal performance gaps to the so-called best in class and justify the identification of company-specific ZBx potentials.
Mobilize the workforce
Particularly in retail, which often still operates in functional silos, ensure that employees and stakeholders across divisions and functions have visibility into difficult decisions being made across the enterprise. Regularly communicating positive results and tying ZBx initiatives to strategic cross-functional and cross-hierarchical goals helps ensure personal identification with the strategy across all levels and divisions of the company and builds internal momentum.
Setting the ZBx culture as an example
A Zero-Based-Mindset program should never be started without the full support of top management. Particularly in retail, which is often still characterized by very decentralized decision-making structures, it is important for management to embark on the journey of ZBx programs together, not only at headquarters but also in the decentralized operating units. A basic prerequisite is that the management of decentralized units is also prepared to make sacrifices by foregoing an optimum felt individually for their unit and in the interests of the company as a whole or. The overarching strategic objective of contributing to a new total enterprise solution. The "smart spend" journey calls for many decisions that may run counter to long-standing corporate cultural habits and also established control variables and decision-making structures. Provided that leadership actively engages in the debate and sets the direction for the company to follow, while also being willing to consistently cut old ties A study on zero-based mindset shows that cultural buy-in (67 percent) and change management (41 percent) are the most challenging ZBx challenges.
Outlook: Zero conquers retail
Many retailers have already started to follow the ZBx path of zero-based mentality, on a global level now about 300 retailers. An Accenture study has shown that the use of zero-based mindset has grown exponentially in recent years, averaging 57%. The success proves ZBx right – identified savings potentials are often in the triple-digit million range, and in some cases even higher.
The major disruptors in retail are currently growing exponentially. In the Western hemisphere it is GAFA (Google, Amazon, Facebook, Apple), in the Eastern hemisphere BAT (Baidu, Alibaba, Tencent), which are constantly opening up new market segments. For classic stationary retail companies, it is therefore essential to act with courage and a willingness to change in order to still be able to shape their own future. An essential part of the necessary transformation journey is to take measures that keep the existing business profitable. This is the only way to finance the considerable technological, structural and personnel change requirements.
In an era of massive and disruptive reshaping of the retail landscape, ZBx dogmas can be a critical piece of the puzzle to establish the necessary enterprise agility at all levels and provide the relevant financial resources for the required transformational efforts. So hopefully the boards of the distressed brick-and-mortar retailers will soon be able to sleep more soundly again.
About the authors
Mathias Gehrckens is managing director of retail and consumer goods at Accenture Germany and co-founder of dgroup, part of the global Accenture network. Gehrckens regularly publishes articles and specialist books on the digital transformation of retail, most recently together with retail expert Professor Dr. Gerrit Heinemann and Accenture managing director Thomas Tauber published "Trading with added value – digital transformation in markets, business models and business systems."
Ayse Engel is a senior manager at Accenture, where she oversees the retail finance community. Engel has ten years of experience in finance transformation, developing new operating models for finance and controlling, and building digital strategies for the CFO, with a focus on the retail and consumer goods segments.