How many times have you based your budgets and planning on last year’s figures and cost assumptions? You may have conducted budgeting yourself or participated with others in your organization or for a client. If most of your budgeting and planning has been on that basis, you are in plenty of company. That’s how most budgeting is done. But it results in budget inertia – merely repeating much of the same as before.
Don’t allow ‘anchoring’ to impede your budget planning
The tendency for a piece of information to stick in your mind and influence your interpretation of later information is called anchoring. This is a psychological bias you most likely aren’t aware is happening. Thus last year’s approach is very likely to stick in your mind and influence your approach to budgeting this year.
The budget discussion will often start with a comment something along the lines of “The budget last year [for this project or annual plan] was $x. We should probably allow for an $x + y% increase for the coming year.” This is the anchoring effect in action. It assumes last year’s activity will be largely repeated and is still needed, and it assumes the cost will be much the same as last time, perhaps a little bit more.
However, you can re-anchor the budget around something different, typically a vision of the future that has emerged from strategic planning at your organizational or departmental level.
Traditional budgeting usually involves a general overall incremental increase over the previous budget, such as a 2% increase in spending for the coming financial year, rather than justification of both old and new expenses, which is required in zero-based budgeting. Traditional budgeting tends to focus on new expenditures, while zero-based budgeting starts from zero and involves reviewing recurring expenses in addition to new expenditures.
At the organizational level it is implemented as an effective way to reduce costs and increase efficiencies, but it also creates a great opportunity for you to advocate for more funding for communication activities if you can demonstrate a good return on investment (ROI) for those activities. Basically you go back to square one for the budget calculations and assumptions. It involves reviewing the need from scratch to determine its priority rather than assuming the activity should be funded at all or in the same way because it was funded previously.
A zero-based budgeting and planning process using stretch targets challenges conventional thinking and brings forth bolder ideas, according to an article, “Your organization wastes time. Here’s how to fix it.” by Eric Garton in the Harvard Business Review newsletter of 27 March 2017. In recent years, zero-based budgeting has been consistently advocated by experts such as international management consultants McKinsey & Co.
This approach can bring tighter discipline to public relations budgets where you are a new PR manager who may have inherited communication programs from previous years that may have questionable value. This happened to me one year when I started a new job in which the previous person, a former journalist, didn’t have much idea of strategic communication, and therefore limited most of his annual work to journalistic activities. In a way, this was liberating because I wasn’t restricted by past ideas, and so in effect I could start from a zero base for planning and budgeting.
With zero-based budgeting you plan for what is needed for the new period regardless of whether the budget is higher or lower than the previous year. For instance, instead of assuming a traditional printed newsletter continues to be needed for an internal or external audience, you might decide to investigate if alternative (or additional forms of communication such as digital media) would be more effective.
A cautionary note
A limitation to zero-based budgeting is the organizational planning and budget environment in which you are working. If you know senior management or client is anchored in last year’s assumptions, you will need to use your judgment on how much latitude you have to not just save costs with zero-based budgeting, but to propose ambitious initiatives.
Since by definition there aren’t existing commitments to activities, you are probably going to be under pressure to produce a strategy quickly to replace the vacuum.
Zero-based budgeting requires more work because it involves scrutinizing old as well as new expenditure to determine what suits best. Also, it creates pressure to reduce costs because it doesn’t just accept previous costs as a given.
Zero-based budgeting tends to favor areas that have measurable outputs, ie dollar revenue or units of production, because their contributions are more easily justified than the often intangible outputs from areas such as PR, client service, and R & D. Therefore, in developing your PR budget, it is important you try to include measures/KPIs for each area of activity, especially if you can calculate the ROI for the activity. In this way you can justify the budget allocation to PR.