Procurement Glossary
Zero-based budgeting: definition, methods and application in Procurement
November 19, 2025
Zero-based budgeting is a strategic budgeting method in which every expense has to be justified from scratch. In contrast to traditional budget planning, the previous year's budget is not used as a basis, but all costs must be justified again. Find out below what zero-based budgeting means, which methods are used and how current trends affect budget planning.
Key Facts
- Every budget item must be newly justified and approved from scratch
- Eliminates automatic budget updates and historical spending patterns
- Leads to average cost savings of 10-25% compared to traditional budgeting
- Requires detailed analysis of all business processes and their value contribution
- Particularly effective for indirect expenses and overhead costs
Contents
Definition: Zero-based budgeting
Zero-based budgeting represents a fundamental paradigm shift in budget planning that fundamentally challenges traditional approaches.
Basic principles of zero-based budgeting
With zero-based budgeting, each budgeting cycle starts from zero. All expenditure must be reassessed and justified, regardless of historical budgets. The key features include:
- Complete revaluation of all cost items
- Obligation to justify each individual issue
- Focus on value creation and business goals
- Elimination of budget inertia
Zero-based budgeting vs. traditional budgeting
In contrast to incremental budgeting, which uses the previous year's budget as a starting point, zero-based budgeting scrutinizes every cost item. This leads to a more objective allocation of resources and prevents the automatic updating of inefficient expenditure.
Importance of zero-based budgeting in Procurement
In procurement, zero-based budgeting enables a systematic review of all supplier relationships and expenditure categories. It supports strategic decisions when selecting suppliers and optimizes the cost structure in the long term.
Methods and procedures
The successful implementation of zero-based budgeting requires structured methods and clear processes that enable a systematic evaluation of all expenditure.
Phase model of zero-based budgeting
Implementation typically takes place in four structured phases. First, all activities and cost drivers are identified and categorized. This is followed by an assessment according to priority and value contribution:
- Analysis and categorization of all expenses
- Valuation according to goodwill and priority
- Development of alternative scenarios
- Decision and budget allocation
Decision packages and ranking
At the heart of the methodology are decision packages - detailed descriptions of individual activities with costs, benefits and alternatives. These are ranked according to their strategic importance and enable an objective allocation of resources based on business value.
Stakeholder integration and governance
Successful zero-based budgeting requires the active involvement of all relevant stakeholders. A structured risk management approach and clear governance structures ensure the quality of decision-making and acceptance of the results.
Tacto Intelligence
Combines deep procurement knowledge with the most powerful AI agents for strong Procurement.
Key figures for controlling zero-based budgeting
Effective key figures enable the measurement of success and the continuous optimization of zero-based budgeting.
Cost savings and increased efficiency
The key success metrics measure the cost savings realized compared to traditional budgeting. Typical metrics include:
- Absolute and relative cost savings per category
- Efficiency increase in percent
- Return on investment of the budgeting initiative
- Time expenditure per budget euro
Process quality and throughput times
Operational KPIs evaluate the efficiency of the budgeting process itself. These include throughput times, number of iterations and quality of decision packages. These metrics help with continuous process optimization.
Strategic orientation and value contribution
Strategic KPIs measure the extent to which budget allocation supports the company's objectives. The share of strategic investments in the overall budget and the focus on supplier development are important indicators of long-term success.
Risks, dependencies and countermeasures
The implementation of zero-based budgeting entails specific risks that can be minimized by taking appropriate measures.
Implementation risks and resistance
The high cost and complexity of zero-based budgeting can lead to resistance within the organization. Employees often fear additional work or budget cuts. Successful implementation therefore requires comprehensive change management measures and clear communication of the benefits.
Data quality and analysis errors
Incomplete or incorrect data can lead to incorrect decisions. The quality of zero-based budgeting depends largely on the availability and accuracy of the basic data. Robust data validation and continuous quality control are essential.
Operational continuity and business interruption
Budget cuts that are too radical can jeopardize operational continuity. A balanced risk analysis and gradual implementation help to avoid business interruptions. Critical business processes must be evaluated particularly carefully.
.avif)
Practical example
A medium-sized production company implemented zero-based budgeting for its indirect expenses. All cost items from IT services to facility management were scrutinized from the ground up. The result: 18% cost savings with a simultaneous improvement in service quality. The renegotiation of maintenance contracts and the consolidation of the supplier base were particularly successful.
- Systematic analysis of all indirect expenditure categories
- Development of alternative sourcing strategies
- Implementation of new key performance indicators
Trends & developments around zero-based budgeting
Zero-based budgeting is constantly evolving and is shaped by new technologies and changing business requirements.
Digitalization and AI integration
Artificial intelligence is revolutionizing zero-based budgeting through automated data analysis and pattern recognition. AI systems can analyse large volumes of data, identify cost drivers and highlight optimization potential. This significantly reduces manual effort and improves the accuracy of the analyses.
Agile budgeting and rolling forecasts
Modern companies combine zero-based budgeting with agile approaches. Instead of annual cycles, shorter, more flexible planning periods are used. This enables faster adjustments to market changes and improves the company's ability to react.
Sustainability and ESG integration
Environmental, social and governance (ESG) criteria are increasingly being integrated into zero-based budgeting. Companies are evaluating expenditure not only according to financial criteria, but also according to sustainability criteria. This has a lasting impact on supplier strategies and investment decisions.
Conclusion
Zero-based budgeting is a powerful tool for cost optimization and strategic resource allocation. Despite the increased implementation effort, it enables sustainable cost savings and improved transparency. Modern technologies such as AI are increasingly reducing manual effort and increasing the precision of analyses. For companies with complex cost structures, zero-based budgeting offers considerable competitive advantages.
FAQ
What is the difference between zero-based budgeting and traditional budget planning?
With zero-based budgeting, every expenditure is newly justified from zero, while traditional budgeting uses the previous year's budget as a basis. This leads to a more objective allocation of resources and prevents the automatic updating of inefficient expenditure.
How high is the cost of implementation?
The initial effort is considerably higher than with traditional budgeting, as all processes and expenses have to be analyzed in detail. Typically, companies need 3-6 months for the first full implementation, depending on size and complexity.
What cost savings are realistic?
Experience shows cost savings of between 10-25% compared to traditional budgeting. The highest savings are typically achieved in indirect expenses and overhead costs, while direct production costs offer less potential for optimization.
For which companies is zero-based budgeting suitable?
Companies with high indirect costs, complex organizational structures or the need for fundamental cost optimization will benefit in particular. Smaller companies should carefully weigh up the costs and benefits, as the implementation effort can be considerable.
.png)
.png)
.png)
