ZERO-BASE BUDGET (ZBB) SUBMISSION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00573R000600030007-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 31
• Document Creation Date: December 9, 2016
• Document Release Date: April 23, 2001
• Sequence Number: 7
• Publication Date: April 15, 1977
• Content Type: REQ

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Zero-Base Budget (Zr 10 Submission
I. GENERAL
(0 (D I
A. This provides guidance and instructions for preparation and
:,ubm.ission of a simplified zero-base buadg:,t. To the extent possible,
the requirements outlined herein are designed to use v.ch of the data
already prepared for the 1979 Program sub::As yion. Therefore, the
submission will not conform to all of the concepts of the the ZBB
process as we now understand them. F;o ever, the ZBB s,,,sb_:lission will
give Agency management a general idea of r,hat will be involved in tile-
new budget system.
B. For the purpose of this initial effort, and in the absence of
more specific information from the Office of Management and Budget,
existing Resource Packages should be used as the basic building blocks
for development of your zero-base budget. However, to bring your
submission into closer conformity with some of the concepts of ZBB,
some adjustments ih the resource levels as included in your Program
submissions may be necessary. Separate packages for the -incremental
resource levels of existing Resource Packages must be dev`lo`ed.
We do not at this time intend to seek detailed funds data (i.e., at
the object class level); only total resource requirements will be
reflected in your ZBB submission. You should use both the position
and funds data in your Program submission as a basis for the resource
requirements included in your ZBB submission.
C. The ZBB submission should use the terms we understand that
0t13 plans to apply to the new process. Specifically, the tern;
"Decision Package" and "Decision Unit" will be used. In general,
the latter equates to our existing Resource Package ;chile the former
equates, to each of the various levels proposed for existing Resource
Packages. For example, in relation to your Program submission, the
min irnum resource level for an existing Resource Package becomes a
separate Decision Package; the additional resources proposed above
the minimum level to bring the same activity up to the principal
level become a separate Decision Package; the resources above the
principal level which bring the activity up to the max:-.ca level
also become a separate Decision Package; and the aggregrat_e of
these Decision Packages (i.e., a "Decision Package Set") b comes
Decision Unit.
II. CLii'1BERING OF DECISION 11P.-CRAGI?,S
A. To facil it_.at e the Id ntii it`s' ior: of D -cision during
the ranking process by different levels o man_ ger~ent, a st.:;.,alard
nurrI; 'r ing system is desirehie, We prop- o, e that a cc:-:ai = _.: r of
ne ;- he
letters to the rigid
( identify ti`:C.'{~;: t:r:. i~_t.C , LO`? ~~"Li ;:) c:[l.~ 'T_LT?..r
(t ; .i.caent L[y the repro:; _; :. nq the various
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B. The first letters will he the co;iponent abbreviation, to be
followed by a slash ("/") and a letter (beginning with the letter "A")
representing an existing Resource Packag-~, and a nu: r in parenthesis
to identify each of the several packages within th s _ecific activity
or program (i.e., Decision Unit). For exerple, of 4)" would
be the first of four Dec is ion Packages for Decision Unit A in the
Off ice of I?:ed ical Services. The "A" in this example_ e uete.i to the
Resource Package which the Office of Medical Services refers to as
"OlMS 1" in its 1979 Program submission.
III. PREPAP TION OF THE, ZBB SUF3 iISSIC.3
A. Decision Package submissions will be made in the format shown
in Exhibit A. The data for each package should not exceed two pages
in -length. ?~-
B. A set of' Decision Packages, representing a Decision Unit,
will be summarized in the format shown in E. ,hibit B. Much of the data
required for Sections II, IV, and VIII of Exhibit B can be readily
adapted from the appropriate Program submission. The Decision Unit
Summary also should be limited to two paces if possible.
C. A ranking of Decision Packages will complete the 77BB sub-
mission. The component ranking will be prepared in the format shown
in Exhibit C, with the Directorate ranking in a similar format as
shown in Fxh ibit D. It should be opplias ized that the ranking of
Decision Packages in terms of the essentiality or priority of the
activities and programs proposed is central to the ZBB process.
biiile there may be less significance attached to whether one basic
Decision Package is ranked higher or loner than another basic Decision
Package [e.g., CMS/C(1 of 3) in relation to OMS/A(l of 5)], the rank-
ing of Decision Packages, and particularly incremental packages is very
important. Therefore, careful attention should be paid to the order
in which Decision Packages are listed on the ranking forms (Exhibits
C and D). In this process, program r n_;nagers must decide on he
relative importance or e.ssei'.i.L.?lity of all Decision Packages subject
to their review and evaluation [e.g., whether O3/A(2 of 4) is irore
or less es ren tia
l than `i; 7
/._?(1 of 33), i"~h-n 0-S/C(2 of 3), L.c^.].
IV. CT:ii3R
Your ZF13 ~u'^i1LF;. ion L;, c1;.~:'. in the OC:L.L:ce of the C:):, trol.lor on
11 3.077 .in two
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T . flt1 L ICl. 0 n.
P2%a.~, -7e C;_ N -+-+~
n2
Program Category
Directora~te_ Component Unit(s)
II. n^ riction:
Program Subcategory
is can generally be ecuated to a portion of an existing Resource Package. This same
es~r -r't on, to the extent applicable, should be repeated for each additional i
aC'':c;C; i r ^ :~_ iss on
incremental resource levels for this same program or activ:ty. 11o'r7ev`r,
C r:ton daza for incremental Decision cCk Cshould cover any Speci_fic 7n i V i ty
For
resources a -re requested and which is not e? n 1
generally covered in the description of the
b'ro ; s .g . )
_'rce R crj re marts (Dollars in Thousands)
'_977 (Actual)
Funds
Decision Package Data
~.c c +
1978 (Congressiona i 1979
Posit. io s Funds positions r Uri'-' S
(P; ;ition and fund data for 1977 and 1973 ; ay be included as appropriate in only the
basic D,-cis-ion Y'ackage; in such Case no entries for 1977 and 1978 Should be made in incremental
CiS:icn Packages for this same program or activity. )
IV. Short-term Obloctivee:
(briefly the objective of the Decision Package, particularly in terns of output,
and ac rol atoll to ;:PC Major. Objective for the total Decision Unit--Which i the aggregation ~~ Z of
all Dec: .ion sac?i ges for this progr am or activity. For incremental Packages, the discussion
Should focus on what will be acco.Mplishc.d with the resources requested.)
V. Other Information:
(Provide any additional information which might be useful in evaluating the merits of
approving this Decision Package. It is appropriate to include here, particularly for the
or. basic package, the effects or. impact of not approving the Decision Unit.)
Sc~ r r r m
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Decision Unit Summary
T_ . Identification:
Package Name
No.
Direct-orate Component Unit(s)
r, ogramn Category Program Subcategory
II. Description of Pro rains and Activities Comprising the Decision Unit
(This can generally be equated to our present Resource Package)
I I = . Res urce ?ecu' cements :
1977 Actual 1978 (Congressional) 1979 (?e:uest)
Cumulative Total Cumulative Total This Package Cumulative Total
nos. Funds Po--. Funds Pos. Funds ?os 'unds
(Only a s;Ingle entry for positions and funds is required for 1977 and 1978, and should appear
on the snme line as the last entry for 1979. )
_ ka. e 1 O-:' n
Package 2 of n
racks e 3 of n
etc.
IV. ;e or Ob_je.ctives:
(Briefly describe the major objectives, particularly in terms of output and for acco:n-
plis~merits expected from the programs and activities involved.)
V. Current Method(s) of Accomplishing the Major Objectives:
(Br.'_efly describe the current process through which you get the job done.)
S-E-C-n-E-T
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S-E-C-n -T
Decision Unit Su xarnary, (Continued)
tives:
(briefly describe the feasible alternatives to the present and/or proposed manner of
accolishing the stated objectives, and provide the reason(s) for not proposing adoption
of the alternative(s) described. If appropriate, a discussion of longer-range cost factors
should be i nsluded . )
t~ccc-,-ol i sn~m ents :
(This can generally be equated to the "Evaluation" portion of the present lr:,)esource
`1 C'l, e s buission. The .rogress to iard meeting the major objectives should be dl cussed and
to t?,r exte L possible should include both quantitative and qualitative measures of perforl ance. )
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Cc?cnen t
Rank Package
Com-~;onent Ranking
Directorate
This Package Cumulative Total
Pcsiticns Funds Positions "onus
S-E-C-R-E-T
Exhibit C
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Directorate Ranking
Dire.- Cori to
Thi !~ Packago - Cumulative Total
Positions `unc,S Positions run:,is
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INTRODUCTION TO ZERO-BASE BUDGETING
Graeme M. Taylor -
Senior Vice President
Management Analysis Center, Inc.
1120 19th Street, N.W. - Suite 316
Washington, D.C. 20036
January, t977
This article will appear in the March, 1977, issue of
The Bureaucrat
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INTRODUCTION TO ZERO-BASE BUDGETING
Graeme M. Taylor
The term "zero-base budgeting" is not new. In the most literal sense, zero-base
budgeting implies constructing a budget without any reference to what has gone
before, based on a fundamental reappraisal of purposes, methods and resources.
This interpretation of zero-base has been roundly condemned as naive and
impractical, if not downright mischievous. The U. S. Department of
Agriculture's attemp at this sort of zero-base for FY1964 was widely regarded
as a failure. As Allen Schick has remarked, even a teenager doesn't have an
identity crisis every year. Or, as Dean Acheson pointed out in another context,
wb can't have a foreign policy if we pull it up every year to examine its roots.
But there is another version of zero-base budgeting. Developed originally at
Texas Instruments by Peter A. Pyhrr as a method of controlling overhead costs,
and subsequently ,implemented by Jimmy Carter in the State of Georgia, this
latter day zero-base budgeting is simply the systematic application of marginal
analysis techniques to budget formulation. It is this version of zero-base
budgeting which is the subject of this article.
Although the basic concepts of zero-base b!.idgeting as used at Texas Instruments
and Georgia are indeed simple, putting them into practice is difficult, complex
and demanding. 'Many organizations, however, apparently believe the results are
worth the effort. Within the past three years, at least one hundred major
corporations have applied zero-base budgeting to portions of their operating
budgets. A'handful of states and several local governments have adopted zero-
base budgeting. A few Federal agencies have introduced zero-base budgeting on
a limited basis within the past year.
Some of the growing popularity of zero-base budgeting must no doubt be
attributed to Presidential campaign publicity. But it would be a mistake to think
that the bandwagon syndrome is the main reason for ZBB's adoption. The real
explanation lies in certain intrinsic features of the process itself coupled,
fortuitously, with the needs of the times.
Graeme M. Taylor is Senior Vice President of Management Analysis Center, Inc.,
(MAC) 'Washington, D.C., a management consulting firm which has assisted over
C:) 0
fifty public and private sector organizations implement zero-base budgeting. He
is the co-author of Program Budgeting and Benefit-Cost Analysis and Systematic
Anal si both ublished by Goodyear Publishing' Com: am . He was educated at
~ 9?aQAJI T19 r a IQs trgol.
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Industry views zero-base a geting as a more rational approach to ne perennial
problem of controlling overhead. The recent recession forced most companies to
reappraise their discretionary costs, and many found ZBB an instrument ideally
suited to the task.
In the public sector, the example of New York City looms like a severed head
placed on a spike as an awful warning. Today, virtually everyone is a fiscal
conservative. There is a growing realization that program initiatives to meet
public needs must go hand-in-hand with sound financial management. As
President Carter pointed out in Nation's Business (January, 1977):
... there is no inherent conflict between careful planning, tight budgeting,
and constant management reassessment on the one hand, and compassionate
concern for the deprived and afflicted on the other. Waste and inefficiency
never fed a hungry child, provided a job for a willing worker, or educated a
deserving student."
Zero-base budgeting has come a long way since its origins at Texas Instruments
and Georgia. These early models have been substantially improved upon and
refined in later, less-publicized applications, while still retaining the original
fundamental principles. Experience indicates that there are almost limitless
ways to adapt the basic ZBB concepts to the varying decisional needs of different
organizations. This should come as no surprise. Zero-base budgeting is, after all,
a management oriented approach to budgeting. It follows, then, that its basic
principles must be adapted to fit each organization's unique management
structure and culture.
This article will attempt, somewhat boldly, to summarize the state of a complex
and rapidly evolving art. The writer's viewpoint is not that of a scholar, but
rather a practitioner, one who has been actively involved in helping organizations
design and implement zero-base budgeting. The reader will therefore not find
much in the way of public administration theory, nor any glittering generalities
to serve as a conceptual framework. If any apology is needed, it would be this:
It is too early to predict the ultimate fate of zero-base budgeting in the public
sector. It could evolve in many different ways to serve different needs in
different government organizations. Many versions of zero-base budgeting could
comfortably coexist in Washington, in the states and in city halls. Different
approaches may be quite appropriate even within the same government, at
different levels and for different kinds of programs. No unified theory is likely
to emerge; certainly none can be discerned at this time.
The basic principles and elements of zero-base budgeting, common to virtually
all applications, are first summarized. Each of the elements of zero-base
budgeting is then treated in more detail. Certain considerations affecting the
design and implementation of zero-base budgeting are then reviewed,
emphasizing the variety of possible approaches and the importance of tailoring
the approach to the unique circumstances of each organization. Some
differences between zero-base budgeting in the public and private sectors are
then di icussed, and results of a survey of corporate ZBB users are presented.
The concluding section attempts to examine certain options for the application
of zero-base budgeting to the federal government.
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PRINCIPLES AND ELEiAENT~i ZERO-EASE N
The distinctive and essential hallmark of zero-base budgeting is its focus on the
total budget request. The current spending level is not regarded as an inviolate
base, immune from detailed scrutiny. Existing activities are e-camined along
with proposed new activities.
In traditional incremental budgeting systems, all participants behave as if the
relevant question is: "At the margin, is an increment in Program A more
important than an increment in Program B?" Decisionmakers are essentially
-forced to accept or reject a program increment, or to reduce its amount.
Incremental budgeting effectively denies decisionmakers the option of trading
off a requested increase in one activity against a reduction in another.
Zero-base budgeting places a premium on offering decisionmakers a range of
choices among alternate funding levels. The relevant budgetary question is: "At
the margin, is an increment in Program A more important than an increment in
Program B or a previously funded item in Programs A, B, C. . . . . ?" It. is
explicitly not assumed that present activities must necessarily be continued.
Given revenue constraints, an existing activity may be reduced or eliminated
entirely to make way for new activities, or one program may be cut back to
permit another to expand.
Basic Elements of, Zero-Base Budgeting
The three basic elements of zero-base budgeting are:
identification of "decision units"
a analysis of decision units and the formulation of "decision packages"
a 'ranking
The decision units are the lowest-level entities for which budgets are prepared.
One important requirement is that each decision unit have an identifiable
manager with the necessary authority to establish priorities and prepare budgets
for all activities within the decision unit.
ZBB calls for two kinds of analysis. First is the analysis which most truly
deserves the name "zero-base" --- a re-examination of the purposes, activities and
operations of the decision unit. In this analytic phase questions such as the
following are addressed:
o What would be the consequences if the decision unit were entirely
eliminated?
o How can the decision unit's purposes be achieved in a more cost-
. effective manner?
a How can the efficiency of the decision unit's operations be improved?
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Following the zero-base review of purposes, activities and operations, the
decision unit manager then segments the decision unit's activities into a series of
"decision packages". The first package contains those activities, or portions of
activities, deemed highest priority. The second package contains the next most
important items, and so on. The costs and consequences of each package are
documented for higher-level review.
The third basic element of ZBB is "ranking", the process whereby higher level
C. 0
managers establish priorities for all decision packages from all subordinate
decision units.
The priority-ordered sot of all decision packag s for the entire organization is
then reviewed in light of the probable level of funding available to the
organization. Packages which can be funded within the available total are
included in the organization's formal budget request; those which fall "below the
line" are dropped from the budget request - unless the organization chooses to
seek an increase in the total funding level. -
DECISION UNITS, DECISION PACKAGES, AND THE RANKING PROCESS
Identifying and Defining Decision Units
Decision units are the basic entities for which budgets are prepared. Decision
units must be identified and defined as a necessary first'step in implementing
ZBB. This step, of course; is part of the initial design of the ZBB approach and
need not be repeated in subsequent budget cycles, except to accommodate new
activities or to improve the decisional usefulness of the budget structure.
Decision' units-may be programs; functions; cost centers, organizational units or,
in certain cases, line items or appropriatiorfitems.
A key consideration in selecting decision units is the organization's
"responsibility structure". Decision units should generally be selected to parallel
the flow of responsibility for budgetary decision making within the organization.
To illustrate this point, consider an organization which operates a number of
neighborhood health centers, each of which offers a variety of health services
such as tuberculosis control, veneral disease control, lead poisoning control,
maternal and child health clinics, and so forth. The decision units may variously
be (a) each center, encompassing all health services provided within the center,.
(b) each separate health service provided in each center, or (c) each health
service aggregated across all centers.
If each center has a manager who is responsible for resource allocation within
the center, then the individual centers may be logically selected as decision
units. If each health service within a center has an identifiable manager
responsible for resource allocation within that service, each service within a
center, could be viewed as a separate decision unit. On the other "hand, if
resource allocation decisions within health services are made system-,vide by
identifiable managers at the organization's headquarters, then the individual
health services, ago egated across all centers, would be logical decision units.
A .Wbv6&Po?*bMa 2kf0 ~1$' 2 ~n $3~'f0 rT3 b~~U3~ Lion decisions is
distributed. -
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There is, of course, a fourth option: the entire organization may be considered a
single decision 'unit. This option would make sense if all resource allocation
decisions are made by the organization's chief executive, or if other
considerations become important - such as the relative size of the organization
with respect to the government of which it forms a part. For example, if an
entire city is engaged in zero-base budgeting, then, from the standpoint of the
Mayor, the entire neighborhood health center program might be logically one
single decision unit. Relative size,, therefore, is a second important
consideration in identifying decision units.
The availability of data often constrains the choice of decision units. The
organization's accounting system may not provide reliable cost data for tile.
"ideal" decision unit structure. Compromises may have to be made, or the
accounting system may be modified so that something approaching the ideal
structure may become feasible at a later time.
Analytic Emphasis
Some organizations emphasize a fundamental re-examination of each decision
unit before its manager is permitted to proceed with the formulation of decision
packages. In other instances, only perfunctory attention is paid to the
questioning of objectives, activities and operating methods, and decision
packages simply reflect a prioritization of the status quo. The relative emphasis
on each type of analysis is a matter to be decided by the architects and users of
the zero-base budgeting system. Both types of analysis are useful, -but
considerations. of time, practicality and available analytic skills sometimes
dictate that the former be sacrificed and attention concentrated on the latter.
Formulation of Decision Packages
? The decision unit manager formulates, in` priority order, a series of. decision
packages which together equal the sum total of his budget request for the
decision unit. Each decision package consists of a discrete set of services,
activities, or expenditure items. The first, or highest priority, package addresses
the most important activities performed by the decision unit, i.e. those which
produce the highest priority services or which meet the most critical needs of
the decision unit's target population. The cost of this first package is usually
well below the current level of funding for the decision unit.
The first, highest priority package is often thought of as the "minimum level" or
"survival level" for the decision unit, the level of service and funding below
which the decision unit might as well be eliminated.
In some cases decision' unit managers are allowed complete freedom in
determining the appropriate magnitude of the first package, subject only to the
constraint that it cost less than the current funding- level. In other cases,
guidelines are provided in the form of a percentage of the current level, for
example: "The first package should be less than 75`6 of current", or "The first
package should be between 40?6 and 60% of current".
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In most cases no firm rule is established for the total number of packages for
each decision unit. In practice, the number can usually be expected to vary
between a minimum of three and a maximum of around ten.
Typically, packages are smaller and more discrete as their cumulative total cost
approaches and exceeds the decision unit's current funding level. This offers
de'cisionmakers a more practical range of flexibility in the subsequent ranking
process.
The decision unit manager's analysis of decision packages is communicated on a
series of forms, using a separate form for each decision package. Each form
documents:
o Precisely what services are to be provided, or activities performed, if
this package is funded.
o The resource requirements of the package and their cost.
o A quantitative expression of workload, output or results anticipated if
the package is funded.
Usually, each form displays, in addition to the cost of the package, the
cumulative cost of this plus all preceding (higher priority) packages in the series
for the decision unit. Often the cumulative cost is also expressed as a
percentage of the prior year's total for the decision unit. Similarly, the
quantitative program measures are also usually cumulated and expressed as a
percentage of the prior year figure.
In some cases, the decision unit manager is asked to identify additional
information on each decision package form, such as "Benefits of funding this
package", "Consequences of not funding this package", "Present services which
would *not be provided if only this package and those which precede it are
funded", "Support required from other decision units if this package is funded",
and the like.
The amount of cost and object class detail required on the decision package form
can vary considerably depending on the requirements of the ZBB system's users.
One approach is simply to record the package's total dollar cost and the number
of positions involved. Or, the dollar cost may be broken down into considerable
object detail. A breakdown by source of funds can also be shown, if appropriate.
In many cases it is helpful for the next level of management to conduct a
preliminary review of proposed decision packages before the decision unit
managers prepare the detailed forms. This review can help ensure that each
decision unit manager and his superior agree on the priorities governing the
formulation of decision packages before detailed cost estimates are prepared and
forms filled out.
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CPYRGHT
Ranking
Ranking is the process in which a manager reviews all decision packages (from all
decision units reporting to him) and establishes their relative priority. A
"ranking table" is prepared, listing all decision packages in descending order of
priority. A running cumulative total is kept to indicate the total budget request
for the sum of each package plus all preceding (higher priority) packages.
Ranking may be performed in a variety of ways, for example, unilaterally by a
single manager, or in a committee fashion where the manager meets with his
decision unit managers.
Depending on the size and complexity of the organization, a series of rankings by
successively higher levels of management may be required to produce a single,
consolidated ranking table for the entire organization.
To avoid overwhelming higher levels of management with excessive detail, the
ranked decision packages are often consolidated into a smaller number of "super-
packages" for review and ranking by the next managerial level.
In the ranking process, attention is usually concentrated on those packages which
lie within a reasonable range around the probable "cut-off line", i.e. the expected
funding level for the collection of decision units whose packages are being
ranked. For example, if forty packages are being ranked, it is usually not
necessary to determine *preo:isely the relative priorities ampng numbers one, two
and three, nor numbers thirty-eight, thirty-nine and forty. It is more important
to ensure that those packages which fall just above and just below the probable
"cut-off line" are indeed in the order which properly reflects management's
priorities.
DESIGNING AND IMPLEMENTING ZERO-BASE BUDGETING
Before embarking on zero-base budgeting, an organization must carefully weigh
several factors:
o What are the strengths and weaknesses of the existing budget process?
o What are the organization's objectives and expectations for-zero-base
budgeting?
Who is the principal intended "consumer" of the information generated
by the zero-base budgeting process?
0 C>
o What implementation strategies shall be followed?
o What degree of linkage to existing management systems is appropriate?
o What particular ZBB "technology" shall be employed?
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I"W
Any decision to launch zero-base budgeting should normally be preceded by a
systematic appraisal of the strengths and weaknesses of the existing budget
process. This review may be thought of as a "budget audit" during which
managers assess the degree to which the current budget process serves or fails to
serve the organization's planning,.management and control needs. Design of the
approach to zero-base budgeting can then attempt to build on existing strengths
and correct deficiencies in the current process.
The organization should next explicitly address the question of what it hopes to
achieve by implementing zero-base budgeting. Different organizations may have
quite different objectives and expectations for zero-base budgeting. Some of the
CP C>
more common are:
Cut budgets rationally.
Reallocate resources from lower to higher priority areas.
o Yield better information or more credible justifications to . support
budget requests.
Forge a better link between budgeting and operational planning and
control.
o Provide top management with better insights into the detailed workings
of the organization.
Create more substantive involvement by line managers in budget
formulation.
Achieve various "organizational development's objectives (such as
improved communication between managerial levels, greater sense of
participation, more identification with the organization's mission).
o Enable top management to evaluate the managerial capabilities of
subordinate managers.
The design of the zero-base budgeting process may vary depending on who is to
be the principal consumer of the information produced. The consumer may be
the legislative body, the chief executive, the department head, or line managers
- or all of the above.
Implementation strategies must be carefully considered. For example, 'should
zero-base budgeting be applied to the entire budget or should certain activities
or expenditure items be excluded? Should full-scale implementation be
attempted immediately, or should a pilot test be first conducted? Should zero-
base budgeting replace or supplement the existing formal budget process?
The organization must also determine the appropriate form and degree of linkage
to management systems already in place. What should be the relationship of
zero-base budgeting to current planning, control and information systems? Can
ZBB be appropriately meshed with an existing MBO system?
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Finally, the organization must design the technical and procedural aspects of the
zero-base budgeting process. Particular attention must be paid to the following:
o The logic by which decision units are identified and defined.
o The type of analysis to be emphasized. -
The particular forms, procedures, timetable, guidelines and instructions
to be used in implementing the process.
o The type and amount of training and technical assistance to be
provided.
Zero-base budgeting can take many forms and be used for many purposes.
Existing public sector applications illustrate this variety. For example, the U. S.
Navy, in response to a Congressional mandate, is using a partial version of zero-
base budgeting to provide more detailed justification of its FY78 Operations and
Maintenance appropriation request. The Environmental Protection Agency has
used zero-base budgeting principles to develop a FY77 operational plan for one of
its programs. HEW's Data Management Center uses zero-base budgeting, as part
of a total management sysfzrn, for -manpower planning and project planning and
control, as well as budget formulation.
Zero-base budgeting need not rely on a "bottom-up" approach. In some cases, in
fact, a bottom-up approach may be entirely inappropriate. A structured "top-
down" approach to zero-base budgeting is illustrated in the following example,
drawn from a large municipal hospital.
A framework of very specific and detailed planning guidelines, developed by the
hospital Administrator in conjunction with teams of doctors and other
professional staff, was provided to all departments in the hospital. The
guidelines consisted of, first, a series of "capacity" figures (e.g. varying numbers
of in-patient beds) and, second, a number of "service levels". Each service level
was defined in terms of the medical and surgical specialties to be offered by the
hospital at that level, and also in terms of the standards set for a number of
"quality" proxies (e.g. nursing-hours per patient-day). Each department head
then developed estimates of resource requirements for every combination of
capacity and service level. The departmental estimates were reviewed and then
aggregated, producing a capacity/service level cost matrix .for the hospital. This
permitted the Administrator to develop a budget which, in his judgement,
reflected the appropriate balance between size, range of medical services
offered and standards of service.
An alternative to the approach described above would have been the more
traditional "bottom-up" zero-base budgeting process. Individual units, such as
.pathology and food service, would have independently formulated decision
packages for subsequent ranking by division chiefs and then by the Administrator.
But thid approach would have ignored critical interdependencies between units in
providing service.
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10
CPYRGHT
By linking dollar figures explicitly to service variables, at various possible
funding levels, the Administrator's budget presentation clearly demonstrated the
service impact of increases or decreases in his recommended budget. This was
useful in the case of this particular hospital, since it had undergone successive
budget reductions but was still expected by the city government to continue
providing the same level of patient care. (What the "same level" meant was
never precisely defined by the city fathers). The budget presentation made clear
the consequences of further budget reductions - either wards would be closed, or
the level of service would deteriorate, or both. Budget reductions could no
longer be divorced from their service impacts.
In concluding this section on considerations affecting the design and
implementation of zero-base budgeting, a number of issues will be listed. It is
not possible, in the scope of this article, to give them the detailed discussion
they deserve.
The users of zero-base budgeting must decide how to modify the process in the
second and subsequent cycles following the initial year of implementation.
Priorities may be reviewed to ensure that they are still relevant, decision units
may be added or deleted as appropriate, new decision packages may be
formulated to meet newly identified needs, and cost and output data may be
refined and updated. But, it is usually not necessary to repeat the considerable
development effort normally required in the first year. Illustratively, the focus
can shift to areas of the budget not included in the first year, or the process can
be driven deeper in the organization, or the reliability of data can be improved,
or the process can be more selective in concentrating analytic efforts on
particular issues.
Other design and implementation issues might include the appropriate role of the
computer- 'or example in reducing paper vor aggregating data-in various ways,
helping decisionmakers ask "what it" questions, or aiding the formulation of
decision packages by providing analytical modeling capabilities to predict
cost/output relationships. The treatment of administrative support units
deserves special attention; it is necessary to ensure that packages formulated for
support units are consistent with packages formulated for the primary "mission"
units. Another important design issue is the degree to which top management
wishes to drive budgetary accountability deeper into the organization. Although
the existing responsibility structure may be the starting point for identifying
decision units, management may elect to delegate budgetary responsibility to
lower levels - not merely for the purposes of zero-base budgeting, but as a
means to increase management commitment throughout the organization.
PRIVATE VERSUS PUBLIC SECTOR USE OF ZERO-BASE BUDGETING
The annual operating budget plays a.less central role in the private sector-than it
does in government. Corporations employ a variety of management systems in
addition to budgeting, to help set goals, acquire and allocate resources and
measure performance. Strategic decisions, such as decisions to enter new
markets or launch new products, are usually completely divorced from the annual
routines of budgeting. Formal business plans are prepared to set short-term
AR@,g9ye FcTaWe ?~? 1~1~t 2 n t~9- #$3~R~t7o @gQii0 9(A #9cat-place sands a
variety of signals to the decisionmaker on the need to change direction or to
shift resources from one venture to another.
 11
CPYRGHT
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In government, on the other hand, the budget process must generally serve many
purposes. Certainly, many strategic policy decisions are initially made outside
the budget, for example, through legislation or regulation. But the budget is the
only conduit for funds to implement legislation or to enforce a regulation. It is
only through the budget process, by appropriation or ordinance, that a President,
Governor, or Mayor may legally. draw from the public purse.
The budget process, in addition to its legal function in conferring authority to
expend public funds, also serves, explicitly or implicitly, as the mechanism for
establishing public priorities. Through the budget process, competing claims are
resolved and expenditures brought into balance with revenues. Choices are made
about which programs will expand and by how much and, less--often, which
programs will be cut back.
The public budget process also serves in lieu of a management control system.
Unlike a private corporation which can point to growth, market -share and
earnings, and despite a mounting clamor for "accountability", governments are
rarely able to demonstrate the link between funding and results. For a
government, simply living within its means is an achievement. The budget
therefore carries with it strong sanctions to discourage deviations from its totals
and subtotals; underspending and overspending are equally discouraged. Control
is therefore exercised via inputs rather than outputs.
The different role and scope of budgeting in the two sectors partially explains a
striking contrast. in the application. of zero-base budgeting in the private and tn~
public sectors. Virtually all private corporations using zero-base budgeting have 11 0
confined it to overhead expenses, whereas most government bodies employing
zero-base budgeting have applied it to program expenditures as well as to support
costs.
Another part of the explanation lies in the different determinants of
manufacturing and overhead costs. In manufacturing, unit costs are largely
determined by technology, the price of raw materials and union contracts.
Strong competitive pressures, reinforced by financial incentives, encourage,
managers to pursue a continual search for improved manufacturing methods,
cheaper raw materials and more productive ways to use labor inputs. Given unit
costs, total production costs are then a function of sales volume. -
Overhead costs are quite another matter. With respect to these costs, it is much
harder to answer the central budgetary question: "How much is enough?"
Management generally has -much more discretion in funding overhead activities,
and there is rarely any direct benefit-cost relationship to serve as a guide to
appropriate expenditure levels. However, control of overhead costs is critically
important. Excessive overhead undermines profit margins; savings are reflected
directly in the "bottom line". Any budget process, such as zero-base budgeting,
which offers a more systematic approach to control of overhead is therefore
likely to be warmly endorsed by private sector managers.
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*qW
orpora e managers, n owever, nave tounci a zero-:oa~a? uc oting has
advantages other than overhead cost control, according to a survey of fifty-four
private corporations which had recently implemented the process for the first
time. All respondents were on Fortune's 1,000 list.*
Respondents were asked by how much their operating budgets had changed from
the prior. year. Twelve percent reported a budget decrease of more than 10
percent; 30 percent reported a budget decrease of between 5 and 10 percent; 51
percent said that their budgets had changed (increased or decreased) less than
596; and 7 percent of the respondents reported a budget increase of more than 5
percent.
Respondents were also asked to rate zero-base budgeting (a) as a tool to change
total expenditure levels, and (b) as a tool to reallocate resources from lower to
higher priority areas. Results were as follows:
Respondents' Rating (percent)
-
Excellent
Good
Fair
Poor
Not Appl
Tool to change total budget level
28 ?
46
20
0
6
Tool to reallocate resources
34
42
20
2
2
Respondents were asked for their overall evaluation of zero-base budgeting as a
management planning and control system. Twenty-eight percent gave an
"Excellent" rating, 59 percent rated ZBB "Good", 13 percent gave only a "Fair"
rating, and none rated ZBB as "Poor". In response to a question asking them to
compare zero-base budgeting with other formal management systems, 67 percent
of the respondents described zero-base budgeting as "Better", and 33 percent said
zero-base bud ;etincr was "About the Same"; none described zero-base budgeting
as "Worse".
The following table shows how the respondents rated zero-base o-base budgeting as a
process to achieve a number of managerial purposes other than changing budget
levels or reallocating resources. --
Respondents' Evaluation of ZB3 (percent)
Managerial Purposes Excellent Good Fair Poor Not Aopl
Learn more about the organization
55
42
3
-
Manage overhead activities with
more flexibility
20
54
23
3
Improve efficiency/effectiveness
18
58
18
3
Improve communications
16
47
29
3
Develop alternative methods of
operation
15
46
36
3
Plan organizational changes
13
39
2-'.
16
Evaluate staff performance
13
35
35
11
8
5
`The survey was conducted in 1976 by Paul J. Stonich of `IAC, Inc. The results
~ ohl ease d5/Pd~trCI1A1i t81~ 2Qi10 0,0 Ofl~ Asa Planning and
Budgeting: The State of the Art.
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THE FUTURE OF ZERO-BASE BUDGETING IN THE FEDERAL GOVERNMENT
In this concluding section, some options for the application of zero-base
budgeting to the Federal government are discussed, employing the design and
implementation framework described in a previous section. At best, this section
can only present a partial and preliminary list of some issues and options. It was
written before the inauguration, without the benefit of any inside knowledge of
the plans of the new Administration. This discussion may, therefore, be
overtaken by events.
Strengths and Weaknesses of the Existing Federal Budget Process
The Federal budget process works. It comprehensively reconciles the competing
claims of a myriad of programs into a unified whole. Each party understands the
rules of the game, and open conflict is kept to a minimum. The budget, quite
properly, is a central and well-understood fact of life in both executive and
legislative branches of government.
Some weaknesses are, however apparent. Budget justifications focus almost
exclusively on increments . . . the additional positions and dollars requested
above the "adjusted base." Neither the President nor Congress are routinely
provided the opportunity of examining whether objectives should be changed, or
whether the same objectives could be attained more economically, or what would
be the consequences of funding a given program at varying levels. Interagency
trade-off opportunities, within the same general program area, are difficult to
examine without special analyses.. The link between costs and services provided
is hard to discern. Often, cuts are imposed without any explicit recognition of
which services will be reduced by what amounts. Agencies are frequently
expected to "absorb" cuts and still, somehow, maintain the present level of
operations.
Objectives for Zero-Base Budgeting in the Federal Government
Objectives for zero-base budgeting should be formulated realistically, with due
regard for the limitations of the process. Macro policy changes, or changes in
legislation, might better emerge from the type of process envisioned in the so-
called "sunset" bills discussed during the last session of Congress. Or, within the
executive branch, the kind of long-term policy, program and organizational
review that produced Elliot Richardson's "mega-proposal" for the restructuring of
HEW might be more applicable to the design of fundamental changes in how
public needs are to be addressed. -
A tentative set of primary objectives for zero-base budgeting in the executive
branch of the Federal government might be as follows:
Provide the President a range of choices within a given program area so
that he can ensure that the total resources committed correspond to his
policy preferences for that program area.
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o Yield more credible budget" justifications, at aLl levels Within the
executive branch, in support of total budget requests, and not merely
with respect to proposed changes from the prior year. The information
should be structured so as to illuminate the consequences of various
levels of funding, both above and below current levels.
o Encourage agency operating managers to surface recommendations for
improved methods of operation as part of the forntal budget process.
Consumers
There are rnany potential consumers of the results of zero-base budgeting in the
Federal government ... the Cong-res.s (its substantive, budget and appropriations
committees, as well as the Congressional Budget Office and the GAO), the
President and his Office of Management and Budget, agency heads and their
policy, planning and budget staffs, and the several levels of operating "line"
managers within each agency.
Implementation Strategies
The central question is to identify the most productive targets of opportunity for
zero-base budgeting and then determine how best to implement the process in
the selected areas.
Although the President's Budget embraces virtually all. Federal expenditures,
zero-base budgeting may not be equally appropriate for all types of expenditure.
The interest on the national debt is hardly susceptible to annual zero-base
review. A variety of income and other transfers such as social security
payments, veterans' benefits, welfare payments, and general revenue sharing are
controllable only in the long run and can be.ochanged only if there is a significant
shift in the political consensus. Other major expenditures have powerful
constituencies; it would take more than a new budget process to affect-
significantly expenditures from the Highway Trust Fund or the various
agricultural price support programs. Stability and credibility in national sdcurity
and foreign affairs require a degree of continuity in the scale and distribution of
resource commitment. Significant or abrupt changes in long-range procurement
or construction programs, both civilian and military, could cause severe
economic dislocations even if decision makers are persuaded to ignore sunk costs.
In the long run nothing is fixed. In the short run, much is, at least within the
realm of practical politics. This is not to say that programs such as those cited
in the previous paragraph should not be thoroughly reappraised from time to
time. Of course they must be. But the annual budget process may not be the
proper forum for the debate.
There are, however, several classes of Federal expenditures ideally suited to the
type of zero-base budgeting described in this article:
a ? The overhead agencies of government, i.e. those agencies providing
services not to the public but to government itself (e.g. GSA, the Civil
Service Commission, parts of Treasury and Justice, etc.)
 CPYRG'FiT
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o The overhead (administrative and support) activities of agencies, in
Washington and in countless field offices. This is a very diverse
category including a multitude of 'functions such as legal, ADP,
personnel, training, accounting, research, planning, proculi ement,
printing, communications, transportation, etc., etc.)
o Virtually all formula and project grant programs
o Many operating programs of government, where the government itself
acts directly as the provider of service, without any intermediaries.
This group would include organizations such as the National Park
Service, the Forest Service, the VA Hospitals, the Customs Bureau, the
FAA, the FDA, and so forth.
A fundamental implementation issue to be resolved is the relationship of zero-
base budgeting to the overall Federal budget process. Zero-base budgeting could "n 0
be implemented as a supplement to the existing budget process, as a substitute
for the existing budget process, or elements of zero-base budgeting could be
incorporated into the existing budget process.
0 4:7
- The first option would. leave undisturbed the normal routines of budgeting, and
therein lies both its advantages and disadvantages. Treating zero-base budgeting
as supplementary to the existing budget process would cause the least disruption
for both OMB and the agencies. True, it would generate an additional workload,
but this could be accommodated. OMB and the agencies would in zll likelihood
set up special staffs to handle zero--base budgeting, effectively insulating it from
the "real" budget process. This, of course, is precisely what happened to PPB.
The second option is only superficially a real option. The concept of "replacing"
the existing _6udget process ,;vTth zero-base budgeting is wrongheaded. In the first
place, the budget process serves many purposes other than those for which zero-
base budgeting is suited. Besides,. a budget process is not an integrated circuit
module which can be unplugged or reconnected at will.
The third option is a real option, in fact the only one which makes sense. The
basic principles of zero-base budgeting could be made an integral part of the
agency budget formulation process and could form the basis for both the Spring
Preview and Director's Review. The formats of detailed supporting budget
schedules need not necessarily be altered, but the schedules would probably be
completed only after basic program allocations are made by O YMB.
It is probable that at least three overlapping zero-base budgeting cycles would
operate, each with a different focus. The first cycle would operate at the most
detailed level within the agency. At this stage, operating managers would
formulate zero-based budget requests which, through a successive ranking
process, Would flow upwards to the various line assistant secretaries. During the
second cycle, the agency head would formulate the .agency--,vide budget and
review it with OMB. The third cycle would involve OMB's own zero-base analysis
and preparation of priority-ranked budget proposals for consideration by the
President.
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16
CPYRGHT
In. practice, of course, the process would not be as simple and sequential as
suggested above. Several iterations might be required, each cycle would operate
within a framework of planning and policy guidelines . . . much as in the present
process.
Remembering the bitter lessons of PPB, it is to be hoped that OMB will not
simply issue a general "ZBB Circular," leaving it up to each agency to interpret
the instructions as best they can. At the other extreme, 0MB should not attempt
to design and prescribe for all agencies a single, uniform set of forms and
procedures. A more workable, middle-ground scenario might be as follows:
o OMB determines the, most useful format for -its- -analysis and
presentation to the President of budget options, probably built around
interagency program groupings
o OMB negotiates, individually- with each agency, , the format for
presentation of the agency's budget so that it is compatible with both
agency top management needs and the requirements of Presidential
decision making.
o Each agency head is held responsible for development of an internal
zero-base ' budgeting structure and process which most appropriately
meets the agency's own management needs, subject to the condition
that it is compatible with the joint agreement on format for
presentation of the total agency budget to OMB.- The internal agency
structure and process may well vary between bureaus to take account of
differing kinds of programs and the varying decisional needs of lower-
level management.
A major implementation issue 'concerns the form in which the bt:dget will be
presented to Congress. Zero-base budgeting could be viewed solely as an aid to
preparation of the President's Budget, with the zero-base backup excluded from
the justification material submitted to Congress. This would certainly conform
to the stance adopted by previous Presidents in dealing with Congress. It also
agrees with the commonly accepted, some would say constitutionally-mandated,
view that the President must present and defend a single budget total for each
appropriation requested from Congress. It is difficult to imagine any President,
even one who believes strongly in the value of zero-base budgeting, presenting to
Congress a rank-ordered list of decision packages and saying, in effect, "This is
my recommended budget figure, but if you want to increase or decrease it, here's
my priority list of possible increases.or decreases." On the other hand, it is
difficult to imagine a Congress refraining from demanding such material when it
is known to exist, or from asking witnesses to explain those items which fell just
above or below the President's "cut-off line."
Linkage to Existing Management Systems
The budget, whether zero-based or not, will of course have to be capable of
reconciliation with the Treasury's accounts. Various OMIB reporting
requirements, if maintained, will also have to be accommodated. However,
unlike state and local governments, most of the Federal government's
 Approved For Release-,VO1/05/23: CIA-RDP83TOO573R00060 OO07-9
"management systems" are not government-wide but are developed by each
agency for its internal use. Since the most probable approach to zero-base
budgeting in the Federal government would be on a selective, agency by agency
basis, the question of linkage to existing management systems arises primarily at
the agency level. To the extent possible, the design of the zero-base budgeting
approach in each agency should take account of and build upon management
systems already in place, such as planning systems, manpower management
systems, specialized information systems unique to each program, performance
measurement systems, and cost-accounting and other financial management
systems.
Zero-Base Budgeting Technology
As this article has attempted to emphasize, zero-base budgeting may be
variously implemented for different reasons, in different ways, and to serve the
needs of different users. The Federal government is so diverse that no one ZBB
"technology" can suffice. What constitutes a "decision unit" in one part of one
agency will not apply in other parts of the same agency nor at, different levels in
the same agency, still less in other agencies. The decision variables governing
the formulation of "decision packages will. vary within and among programs and
agencies.
It would be possible, however, to develop models, standards' or guidelines to deal
with similar classes of programs or activities commonly found throughout the
Federal government. Sever.aL_ agencies operate .hospitals, for example; similar
approaches to zero-base budgeting would probably be applicable regardless of the
agency. Again, at a more detailed level, similar approaches could be used in
different agencies to deal with functions such as maintenance, ADP operations
and the like. Within 0MB, it would doubtless be desirable to develop a consistent
framework to analyze programs from different agencies within the same general
program area.
Zero-base budgeting has proven, in diverse settings, that it can make 'a useful
contribution to the art and practice of management. Whether it can be equally
helpful if applied extensively in the Federal government is an open question. Its
success will depend on how it is conceived and presented, and on the political will.
to make it work.
If, as seems probable, zero-base budgeting is launched on a broad scale, it is to
be hoped that it will be viewed as an approach to resource allocation rather than
a uniform set of procedures to be applied by rote regardless of the nature of the
program, organizational level or management's needs.
The zero-base budgeting approach will most likely be applied selectively, its
purposes and technology geared to management's unique decisional needs, and
building to the extent possible on systems already in place. The Federal zero--
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base budgeting structure will probably not be a single monolith, a gigantic
pyramid with the President at the apex and agency branches, sections, and field
offices. at the base. Rather, the structure, for zero-base budgeting will most
likely be integrated and unified, if at all, only at the level of O?dB for
Presidential decision making purposes, and rather loosely coupled to the
structures designed by individual agencies for their internal needs.
Tantalizing questions remain. How will responsibility for design and
implementation of zero-base budgeting be distributed between O+IB and the
agencies? Who will conduct the necessary development and training? For what
purposes will it be used? What parts of the Federal budget will be included? Will
it be applied to "tax expenditures"? To the entire revenue side of the budget?
How will its results be communicated to Congress? What will be the
Administration's timing? How much will be attempted for the FY79 cycle?
Finally, what will be the lasting impact of zero-base budgeting? PPB is no longer
a formal, government-tivide system, but its effects are very much with us. The
legacy of PPB has been a demonstrable improvement in the amount and quality
of policy, program and budgetary analysis, in the Federal government and in
0 C) C,
state and local governments throughout the nation. Regardless. of the ultimate
fate of ZBB, the chances are that, after the next few years, budgeting will never
be quite the-same.
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 T ~, r. ~ r7 L,, rp
a 2, 01 0 PP8V
I
e
A lfl x.71 v o-rh.aa uuL
zero-Base Budgeting,
Advocated by Carter,
Used by :zany Firms
secession Sped Its Adoption,
But It All Began in 1962
At Texas Instruments Inc.
A f -xost From Arthur Burns
By Ltuut.EY H. CLARK JR.
staI/ H, poi f r of Tim NV ALL ST lseT.toC its At.
r p on The Washington Post's list of nonfic-
iun best-sellers in the nation's capital:
Zer,Base Budgeting: A Practical Manage-
rent Fool for Evaluating Expenses."
Not only is the book four years old, but it
ells for $19.23 and is anything but light
ummer reading. Its author is Peter A.
'yhrr. the 34-year-old financial vice presi-
ent of Alpha Wire Corp., a little-knowli
irm in Elizabeth, N.J. Despite such seem-
.ig drawbacks, the 231-page book now is
tiling at a rate of more than 700 copies a
~ee;c, and the publisher, John Wiley & Sons,
thinking about a 10th printing.
Zero-base budgeting and Mr. Pyhrr's
ook on the topic have had help from a dedi-
ated promotion manager: Jimmy Carter.
'resident Carter installed the system In
;eorgia during his term as governor, and he
ows that he now is going to bring it to the
ederal establishment.
The book's sales In Washington reflect
he fact that a lot of federal managers want
o know what they are in for. Its sales else.
there indicate that many corporate execu-
ives figure that .vhat Mr. Carter says was
pod for Georgia just possibly might be good
or r them.
Common S-. nse"
What is zero-base budgeting? "It's very
imple, nothing more than common sense,"
ays Robert C. Pearson, vice president and
ontroller of Texas Instruments Inc., the big
)allas-based electronics firm where thesys-
In began evolving about 15 years ago.
Stripped to its essentials, zero-base bud-
eting requires the managers of an enter-
rise to justify everything they are doing or
re about to do. Instead of just setting forth
imposed budget increases, the managers
riust start from scratch each year and pres-
et alternatives involving any increases or
ecreasee in their departments' activities.
"I wipe myself out every year." says
tichard M. Perdue, director of corporate
rublic relations for Texas Instruments.
'And then I sPpraoma 1 EgielReL Se
ping to answer the phone if a newsman
ails?' "
The number of major companies using
zero budgeting "probably runs into the
hundreds." says James Kelley, president of
Management Analysis Center, a Cambridge.
Mass., consulting firm that has helped more
than .10 companies install the system. dir.
Pyhrr, the author of the book, is a part-time
associate of the firm.
Somr.'}iajor liee.rs
Major companies that have used zero-
base budgeting Include Westinghouse Elec-
tric Corp., Xerox Corp. and Allied Van
Lines. Corporate interest in the system has
grown so fast that the American Manage-
ment Association, a hustness-education or-
ganization based in New York, has rum nine
zero-base seminars in the past year and a
half. Another is scheduled for Chicago this
week, and others are planned at a rate of
about one a month.
The association also will soon publish a
new book, "Zero-base Budgeting Cones of
Age." The author is Logan Cheek, manager
of multinational programs for Xerox. Mr.
Cheek says he gets frequent calls from busi-
ness and government groups that want to
arrange meetings on the budgeting tech-
nique.
Even before Mr. Carter starts introduc-
ing zero budgeting in the executive agen-
cies, the Federal Reserve System has been
running pilot studies of the program at the
Chicago Federal Reserve Bank and at the
Federal Reserve Board in Washington.
As far as can he determined, in fact, the
first person to use the phrase "zero-base
budgeting" publicly was Arthur Burns, the
chairman of the Federal Reserve Board. In
196:), when he was counselor to the Presi-
dent, he told a meeting of the Tax Founda-
tion that a "reform of vital significance (to
the control of government expendlturesi
would be the adoption of zero-base budget-
ing."
Ilurns's :valuation
"Customarily," he went on, "the officials
in charge of an established program have to
justify only the increase they seek from last
year's appropriation. In other words, what
they are already spending is usually ac-
cepted as necessary, without examination
Substantial savings could undoubtedly be re-
alized if both the Budget Bureau examiners
and the congressional appropriations com-
mittees required every agency to make a
case for its entire appropriation request ev-
ery year."
The evolution of zero-base budgeting at
Texas Instruments began in 19d2, with the
development of the company's objectives-
strategies-tactics IOSTI system for evaluat-
ing research and development projects. To
decide whether to go ahead with a specific
project, the company found it necessary to
spell out a description of the activity, the
consequences of failing to go ahead with It,
alternative courses of action, and the esti-
mated costs and benefits. All of this eventu-
ally went into a "decision package."
CPYRGHT
1J I - I T
U
,:,; M.:r 197 7
programs G, go a`.ead with. an;i -,.% what
scale.
In the late 196.11 Texas Ins:-: e.^,ts
cials decided they wanted to extend the b,'rd-
geting concept beyond research and devel-
opment--to the +.L-:o-day opera:!ng ex en-
see of the company. All of the company's ac-
tivities, after all, were competing for shares
of the firm's available resources.
Peter Pyhrr, then it young financial ana-
lyst, was involved in the extension of the
concept throughout Texas Ir.str'w'n-r, L-,
Across the company, says :Mr. Pearson.
there now are "thousands" of decision pack.-
ages.
The spread of 1.ero-base bud geang to
other companies and to governments l;roba.
bly began in 1970, when Mr. Pyhrr wrote a
Harvard Business Review article describing
the system. Jimmy Carter, then the ire -ry
elected governor of Georgia, read the article
and got in touch with the author. Subse-
quentis', Mr. Pyhrr left Texas Instruments
and worked as a consultant to Mr. Caster in
installing zero budgeting in Georgia.
Gerry Galbo, a John Wiley editor, also
read the article, and he invited Mr. Pyhrr to
write a book. Jack E. Schang read the arti-
cle, and when he went to Allied Van Lines
as president in 1975 he put in zero ,?ase bud-
geting.
"In my view the,program Is functiorilr -
,very effectively here," says Robert Beeler.
financial vice president of Aliied "We ran
into no real yesista.nce from the manager.,
who had to develop the decision packages.
Because the program was introduced by a
new Resident, it had complete support."
Resistance. at Westinghouse
There has been some resistance else-
where, at least initially. Wcstinghou:?e Elec-
tric Corp. tried a pilot project involving
about 400 people out of 2,500 in the areas of
personnel, purchasing, traffic red real
estate. "Some pretty'good teamwork cam`
out of it after the managers got over the
feeling that they were being threatened,"
says Charles Carroll, director of public in
formation. No final decision has yet beer
made as to whether to extend the program.
Supporters of zero-base budgeting stre..u
that it r. rust he carefully tailored to earl
company's needs. Xerox so far has used ii
only on a selective basis to apprise. opera
tions. For instance. Mr. Cheek u: ed it i;
1971 to assess the company's personnel de
partment. In 1975 the company used a sys
rem much like zero-base, although it warn'
called that, to appraise its world-wide opera
tions
Peter Pyhrr says the system is of uCt
only to large organizations: his own Alph:
Wire doesn't use it. "The formality of th,_
process is required in a large compan;
where you don't have the easy commurdca
[ions you get when principal managers car
sit clown together and make the dec-i.sions,'
he says
A major objection to zero-base has bee,
that it takes more time than the norma
Once the decision packages were devel- ' bud get. making process. However. Mr
11e6J2E~ rC#AsREDR&IDTOO6s7.3R 8610003006j7~+9 says "you have to compare aero-ba_i.
criteria for ranking the packages and th,L3 time not Only with normal brld,get-mttcin,
deciding which research and development bit with all of the revisions through the yea,.
 Approved For Release2J01/05/23 : CIA-RDP83TOO573R00060M0007-9
-and with all of the management time
spent on making decisions."
The first year is always the hardest.
Managers have to be persuaded to appraise
their activities objectively and to draw up
all the decision packages. In later years,
many of the packages need only minor mod-
ifications or updating, proponents say.
Nonproduction Applications
Mr. Kelley of the Management Analysis
Center says zero-base budgeting has been
most useful for nonproduction expenses, and
the experience of Texas Instruments con-
firms that appraisal.
"We're in a highly competitive business,.
under constant pressure to reduce costs,"
says Mr. Pearson. "This may force us to
make many changes in manufacturing oper-
ations during the course of a year." Such
changes, of course, would rapidly outdate
decision packages approved at the start of
the year.
So Texas Instruments remains commit-
ted to zero-base budgeting, but on a simpli-
fied or streamlined basis. "Our whole sys-
tem of management is geared to planning on
a continual basis," Mr. Pearson says. "Our
quarterly rolling plan covers one to three
years out into the future. It's pulled together
in the fall and formalized in January.
"In the process of putting together that
plan we use zero-base. But we don't attempt
to repeat the zero-base analysis every quar-
ter. There have been periodsof rapid busi-
ness change, such as mid-1974 when the re-
cession deepened, when we've had occasion
to refer back to the decision packages. The
packages are one of our points of refer-
ence."
Mr. Pear:3on thinks the program has
been well worth the effort. "The process
helps our managers to understand that what
some other people are doing is important,"
he says. "It makes managers better under-
stand their own functions-and also the con-
sequences of not doing something."
CPYRGHT
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 Approved For Release_2,0,01/05/23: CIA-RDP83T00573R000606530007-9
0 5 APR 1977
]4 MORAIMUM FOR: Administrative Officer, DCI Area
Comptroller, D DO
Comptroller, DDS&T
Chief, Plans and Program Staff, DDI
Chief, Plans Staff, DDA
Director of Logistics
Director of Finance.
Chief, Audit Staff
SU&ECT : Adjustment of Allotments After the End of the
Fiscal Period
1. For. a number of years the Comptroller has issued allotment
advices after the close of a fiscal period whenever the allotment of
one directorate for that period was exceeded as a result of a contract
overrun or other obligation adjustment. By adjusting allotments between
directorates, an effective method was established to control the allotment
of Agency funds after the close of the fiscal year and ensure that the
Agency did not exceed its appropriation.
2.. A review of this procedure indicates that such adjustments need
not be made either to control the allotment of available funds or to
authorize a directorate to exceed its allotment. As you know, the Agency
receives a single apportionment and if obligations do not exceed tl ATINTL
apportionment, we are in compliance with the law. Adjustments to the
directorate allotments after the end of the fiscal Period are unnecessary
and tend to disguise the true status of our internal allotir nts.
13a (2) states:
?'allotments will normally not be increased after the close of
the fiscal period of the applicable appropriation. There is
either compliance or non-co:pliance with the allotment authority
and the issuance of the increased allotment advices after the
close of the year would serve no purpose other than to have the
account show in the 'black'."
Only in the instance of the overall Agency appropriation changing, when
unobligated balances from P.eserve releases are returned to the Reserve,
will an allotment advice be issued.
Approved For Release,2001/05/23 :,CIA-RDP.83T00573R000600p03Q007-9
 'Approved For Release,&0 1/05/23 : CIA-RDP83T00573R000600630007-9
3. If directorates believe obligation adjustments are going to
exceed their end of fiscal year allotment, a memorandum should be sent
to the Comptroller requesting the amount of funds needed and giving the
reason for the increase. Based on the availability of unobligated
balances in other directorates, the Comptroller will issue a memorandum
approving or disapproving the requested increase in obligation.
4. The Comptroller will also issue a memorandum to certain
directorates.:and the Director of Logistics as administrator of the
Materiel Procurement Account, reserving a portion of the unobligated
balance of their allotment for use in other parts of the Agency. The
reserved portion of the allotment will be determined by the Comptroller
after consultation with. the affected allottees. If it should become
necessary for an all.ottee to exceed the allotment balance remaining after
a portion has been reserved, the concurrence of the Comptroller must be
obtained.
5. If you would like additional information about our revis4TATINTL
STATINTL procedures, please contact of my staff.
2
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 Approved For Release l
/ 3 I - TOO57 ! 0 UUOT-9 "WU TRANS lTTAL SLIP 15 A~rll 1977
TO: C1p P/]3&F
ROOM NO.
2D-00
Attached, FYI, are copies of
material on the subject of Zero-Base
Budgeting.
EXTENSION
7726
ROOM NO.
7D02
BUILDING
Hdqrs.
DDA Budget Staff
BUILDING
Hqs.
1 FORM O 24I REPLACES FORM 36-8 FEB WHICH MAY BE USED.
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