Kyle Hawke, Matt Jochim, Carey Mignerey, Allison Watson

Standard cost-cutting programs typically start with a directive to reduce the previous year’s spending levels. As a result, executives naturally focus on the largest expense categories—the tallest trees in the forest. Xero-based budgeting (ZBB) instead asks everyone to rebuild their budgets from the bottom up, with no carryover from the preceding year. This process identifies many small pockets of waste that add up to big savings. It also yields a better fit with the business’s priorities by tapping broader management understanding of choices and trade-offs.

Moreover, ZBB shifts the burden of proof from those tasked with driving cost reductions (such as a finance team or productivity-program-management office) to the business leaders and frontline organizations, which must contribute to both identifying unproductive costs and eliminating them in practice. Instead of debating targets until they disappear, ZBB shifts the organization’s focus to asking, “What would it take to hit the target?”