IS 2012 THE YEAR OF THE ZERO-BASED BUDGET?

WARNING!  YOU WILL BE BORED TO TEARS READING THIS, BUT ENDURE…IS GOOD FOR YOU.

Comparative Budgetary Processes, A Necessary Evolution

Peter J. Fusco

We have visited this subject on several occasions as involved professionals, and also as witnesses to a process over which we have little or no control.  Invariably, we come away with diverse views on its effectiveness as an approach to process fluidity, and as the foundation for organizational continuity.  After all the analysis, two conclusions arise.  The budgetary process is fundamental, and it has two heads.

The private sector engages in zero-based budgeting.  Each entity within the organization must, usually on an annual basis, commit itself to a set of proofs designed to justify its processes, thus its existence.  Two questions, dormant for the year, now come to life.  The first deals with efficacy.  Does the entity utilize allocated resources efficiently enough for the entire organization to benefit?  If not, where can those resources best be applied?

Consider, there is no debate.  Expectations of success are intrinsic.  Resources are applied objectively, with the expectation their application will act like fertilizer on a plant.  It isn’t a question of, “if” it will work.  It is a question of, “when.”

Under normal circumstances, the cold, hard reality of success, as the outcome of applied resources, is sufficient to determine whether or not the process is funded again, not whether it is funded in addition to the resources it already absorbed.

Commonly referred to as “zero-based budgeting,” the annual determination of process efficacy allows for reassignment of limited resources to those processes which pass the “success” examination.  This is efficiency which translates directly to productivity.  It is the stuff of life for private enterprise.

The public sector’s rejection of zero-based budgeting for an incremental system is based on a belief that efficacy cannot be determined in the same fashion as it is in the private sector.  Public entities are not in the “business” of business.  They are in the business of service to the public.  But, as is clear with trillions of dollars in public debt, the need to revisit the public sector’s budgetary processes transcends differences between private and public organizations or political philosophies and party politics.

The public sector’s approach to an annual budgetary review assumes efficacy where there may be little or none at all.  Justification for this assumption lies in the bureaucratic maxim which dictates, the creation of a public entity (program) would not have been undertaken without the desire of the people as represented in their government.  Thus, until it reaches its logical goal, it must be funded.  And here is where the difference between zero-based budgeting and incremental budgeting becomes stark for its fundamental divergence.

The incremental approach suggests if goals have not been reached, additional resources are necessary.  A reasonable approach perhaps, but one which denies the budgetary process itself.  What use is a budget if it cannot be relied upon to clearly state goals by the most efficient means available, the allocation of resources expected to reach those goals?  More importantly, if an organization has only to justify its budgetary increase each year, when does it justify its existence?  Certainly, an organization should be expected to have not only a beginning, but an end.  It should do what it was designed to do, and then cease its existence.  This for several obvious reasons, chief among them, the necessity for reallocation of resources to projects, programs and organizations of higher priority.

All too often the public sector’s budgetary process is reduced to assuming production without a clear measure of what that production should be.  The equation for determining necessary resources on an annual basis works to prove increases in the cost of production rather than proving the efficacy of present production levels.  In other words, the incremental approach to public sector budgeting is open-ended.

Finally, we are constrained by a system which sustains itself on the appearance of productivity and efficacy.  Unlike the private sector whose measure of success is determined by the amount of profit generated from a confluence of activities all pointing (whether in reality or not) to a singular goal, no such focal point exists in the public sector.  Even so, considering the advantages, and the potential for real savings, the zero-based budget makes more sense for the public sector today than ever before.