As part of an overall effort to inject more rigor into the development of their Operating & Maintenance (O&M) budget, a top-10 municipal utility in the Southwest sought to engage a firm with extensive experience in providing consulting services in zero base budgeting (ZBB) for utilities. The municipal’s desire was to implement a sustainable methodology to provide visibility into cost drivers, maximize each budget dollar, and help management ensure credible budget targets for the future.
Prior to the initiative to implement ZBB, new budgets were created based on the previous year’s budget plus or minus any major events. This approach left the utility unsure of just how much they spent by necessity versus how much was spent out of precedence. With installed information systems, detailed analyses of budgets and actuals were difficult if not impossible to conduct.
A bid was issued in the form of an RFP seeking the most capable implementer of ZBB for the budget cycle, as well as institutionalizing a complete ZBB product incorporating a training program, desktop instructions, templates, processes, etc. After a highly-competitive process, including in-person presentations, MCR emerged as the clear choice to implement ZBB for this large utility.
MCR used its proven Zero Base Budgeting process to help our client reach its spending goals. At its core, Zero Base Budgeting requires budget owners to justify all budget requests from a baseline of zero. In a sense, it is the antithesis of the more traditional incremental budgeting process, which embeds a continuation of the past without rigorous spending scrutiny.
The MCR team worked directly with our client’s management team and budget analysts, guiding them through our ZBB process steps:
MCR facilitated sessions with every budget owner and their finance representatives to explore spending paradigms for every budget line item. Working with the client team, we challenged every proposed expenditure in terms of risk and controllability. In these discussions, when identifying the true drivers of cost, hearsay is not admissible. Documented facts with clear references are often necessary to break the paradigms of exactly what influence clients have on spending.
Given the proper budget line item classifications, MCR and the client management team identified opportunities to save $80 million (25%) from the O&M request and $19 million (7%) from the previous year’s budget. These identified reduction opportunities enabled our client to meet their cost targets. In addition to the expense reductions identified by the ZBB process, MCR also identified opportunities for improvements, including:
Financial & Treasury
Security, Safety & Fleet