The short answer
Zero-Up is rebuilding the budget from zero instead of from last year, and it runs on one question: if we rebuilt this business today, would we build it this way again?
The thing it replaces is incremental budgeting — last year plus five percent. That number is not a plan. Last year’s cost structure was never designed; it accumulated. It is the sum of every hiring decision made under pressure, every headcount backfilled because it had always been there, every function that grew because a customer complained loudly enough in 2019, every process built to handle an exception nobody has seen since. It is a sedimentary record of a decade of pressure and accommodation, and you multiplied it by 1.05 and called it a plan. Last year plus five percent is how you lock in every bad decision you have ever made.
Two things decide whether Zero-Up works. Sequence: you cannot reliably reallocate capacity until you have first freed it — simplification by Day 210, Zero-Up complete by Day 270. Run it on a Quad 4–laden organization and the redeployed people will still be doing the old work, because the work never left; only the org chart did.
And the point is not the cut. A Zero-Up that produces only a savings number was run by somebody who did not understand it. The deliverable is a destination: capacity moved to where profit lives, owned by a name, with a number attached.
What does “last year plus five percent” actually do?
It is the second week of October. You are in a conference room with your CFO and eleven functional leaders, and next year’s budget is on the screen. Somebody — never a bad person, usually your most conscientious VP — says the sentence. “We took last year and we added five percent.”
Everybody nods. The meeting moves on. It is the least controversial moment of the entire quarter.
Now think about what actually just happened in that room. Last year’s cost structure was not designed. It accumulated. Every hiring decision made under pressure. Every headcount backfilled because it had always been there. Every function that grew because a customer complained loudly enough in 2019. Every process built to handle an exception nobody has seen since. A sedimentary record of about a decade of pressure and accommodation.
And you just multiplied it by one-point-oh-five and called it a plan.
Incremental budgeting is not a finance technique. It is a memory device — and it remembers your mistakes perfectly and your intentions not at all.
Why is the baseline invisible?
Be precise about the damage, because it is specific.
Every dollar in your cost structure was approved once, by somebody, for a reason. But it is only approved once. After that first year it stops being a decision and becomes a baseline, and nobody ever has to justify it again. The only thing anybody ever has to justify is the change — the delta. So your budget conversation every October is a conversation about three or four percent of your cost structure, and ninety-six percent of it goes through unexamined, forever.
Run that forward five years. The customer who justified that inside sales team is gone. The product line that needed that engineer got discontinued. The reporting package that takes two people to produce goes to a list where nobody has opened it since the last CFO. None of it shows up, because none of it is a delta. Baseline is invisible.
Then comes the compounding part. Baseline gets multiplied. Five percent on top of a bloated base is a bigger dollar number than five percent on top of a clean one — so the businesses with the worst cost structures grow their cost structures fastest. Incremental budgeting is regressive. It rewards accumulated mess.
What is the one question that runs Zero-Up?
Zero-Up asks a different question. Not “what should we add?” One question, and it is the whole exercise:
If we rebuilt this business today, would we build it this way again?
That is it. That is Zero-Up. Everything else is mechanics.
Notice what that question does that a cost-reduction target does not. A cost target asks people to defend their budget. This question asks them to design one — completely different conversations, completely different behavior. Hand somebody a fifteen percent reduction target and you get a negotiation: they bring you the three things you would never cut, hoping you will flinch. Ask somebody to build their function from zero for the business you actually have now, and most will hand you back something smaller than you would have dared to ask for.
Zero-Up challenges an organization to stop defending historical complexity. That is the cultural work underneath the financial work. Because right now, in your company, a significant number of very capable people are spending a significant portion of their week defending decisions made before they got there, by people who are no longer there, for customers who no longer exist.
Why does Zero-Up fail when you run it too early?
The failure is not running Zero-Up. The failure is running it out of order, and the mechanism is exact.
You cannot reliably reallocate capacity until you have first freed it. Run a Zero-Up exercise on a Quad 4–laden organization and you will discover that your “redeployed” people are still doing the old work.
Here is what that looks like on the ground. The exercise says customer service should be nine people instead of fourteen, and the five freed-up people go to a new inside-sales motion covering Quad 2. You move them. You announce it. There is a slide.
Then the phone rings. Same tail of small accounts, same four-hundred-dollar orders, same expedites, same questions — because you never changed the terms, the minimums, the pricing or the service model that generated those calls. The work did not go away just because you moved the person.
So one of two things happens. Either the five people quietly drift back to the old work, because they know how to do it — and now you have a new sales motion on paper that is not happening. Or they do not, service collapses for that tail, and you get the blowup in the board meeting anyway, except now it is a surprise instead of a decision.
That is why Zero-Up sits at Days 250 to 365 and not earlier. The simplification work — the Dirty Dozen, minimum order value, the discount freeze, retiring the tail — has to come first. Not because it is more important, but because it is what makes this one true.
Free the capacity. Then reallocate it. In that order. Every time.
The proof is in a $310 million industrial business Bill ran — 32% gross margin, 8% EBITDA. Around Day 60 they ran the capacity diagnostic: every functional leader in a chair, one question — what percentage of your team’s time goes to the bottom quintile of customers? The lowest answer in the room was 18%. The highest was 41%. The average was 27%. Twenty-seven percent of the functional capacity of a $310 million company, consumed by customers producing about 5% of the revenue.
They did not run Zero-Up on Day 90. They ran the simplification work first: minimum order value, minimum order quantity at the SKU level, the discount freeze on the Quad 4 book, the 187 accounts moved to credit-card-on-order over a single weekend. Order count came down 38%. Gross margin per order went from 19 to 31. Then they ran Zero-Up, and the plan was complete on Day 270 — and what it redeployed was that 27%, which by then was actually free instead of theoretically free.
What are the six steps of a Zero-Up build?
Zero-Up fails more often on sequence than on analysis. Six steps.
Step one. Split direct labor from indirect labor. This sounds like accounting housekeeping. It is the foundation of everything that follows. Direct labor is the hours that attach to a unit of output — a part made, an order shipped, a job installed. Indirect labor is everything else. In most middle-market companies these two are tangled together inside COGS and inside departmental budgets in a way that makes it impossible to answer the only question that matters: how much labor does a given segment of my business actually consume? Until you split them, every segment P&L you build is fiction with decimal places.
Step two. Apply a burden rate. Take indirect labor plus facility and equipment costs and turn them into a rate you apply to direct labor hours, or to whatever your true driver is. One rate, defensible, documented. You will get an argument about precision — somebody will want twelve burden pools. Don’t. A single defensible rate everybody understands beats an elegant model three people can explain and nobody trusts. You are not doing this for the auditors. You are doing it to make a decision.
Step three. Back direct labor out of COGS. Now you can see cost of goods sold as material and true variable cost, with labor sitting where it belongs — as capacity you deploy rather than a cost that just happens to you. This is the step that changes how the leadership team thinks, because the moment labor becomes capacity instead of cost, the question changes from how much does this cost? to where is this going? And “where is this going” is a question a CEO can act on.
Step four. Isolate Quad 1 current state. Quad 1 is your best customers buying your best products. Build its P&L as it exists today: revenue, material, direct labor, burden, the specific SG&A that actually serves it. Do not build the aspiration — build the current state, warts included. This is the only baseline in the entire exercise you are allowed to carry forward, because it is the only one you have verified.
Step five. Build Quad 1 Growth. Now, and only now, you design. What does Quad 1 need to grow — what coverage, what service level, what inventory position, what engineering support? Build it from zero. Not from what Quad 1 has today; from what Quad 1 needs in order to grow at the rate your bridge says it has to grow. Everybody wants to skip this step and it is the one that creates the value, because the output of step five is a demand signal for capacity. It tells you where the freed-up people go before you free them up — which means when you free them, there is a destination.
Step six. Layer in Quads 2, 3 and 4. The rest of the business gets added on top of a structure designed around the profitable core, rather than the core being whatever was left after everything else took what it wanted. Quad 4 gets built last, deliberately, because by then the question is clarifying: given everything now allocated to Quads 1, 2 and 3, what am I actually willing to spend to serve this? Usually a great deal less than you currently do.
Why does the CFO own Zero-Up — not the CEO?
Be emphatic about this, because it determines whether Zero-Up survives contact with next year. The CFO owns Zero-Up. Not the strategy group. Not a consultant. Not the CEO’s office.
Three reasons, all practical.
One: finance owns the general ledger. Zero-Up is a re-cut of your actual accounts. If the person building it does not control the source system, the numbers will not tie — and the first time a functional leader finds a variance between the Zero-Up model and the monthly close, the entire exercise loses its authority and never gets it back.
Two: finance owns the budget cycle. Zero-Up has to become the budget, not a study that informs the budget. If it lives in a strategy deck, October arrives and somebody adds five percent to last year, because that is the process, and the process wins every single time. The only way Zero-Up sticks is if it is the process.
Three: a Zero-Up owned by the CEO ends when the CEO’s attention moves. And your attention will move — you have a bridge to run, a team to build and a board. Finance ownership is what makes it permanent instead of an initiative.
Give your CFO the exercise and a date. That is the mechanism.
What is the difference between occupied and available capacity?
This is the distinction that determines whether any of this converts into dollars, and it is the one most often missed.
You run the capacity diagnostic. A functional manager tells you she spends thirty percent of her week on bottom-quintile accounts. And the room hears: thirty percent of a person is available for reallocation.
No.
She is not thirty percent available for reallocation. She is thirty percent occupied.
Occupied means the work still exists and something still generates it. Available means the work is gone — retired, priced away, or moved to a channel that handles it — and the hours are genuinely open. The two are indistinguishable in a model and completely different in a building.
Here is how to test which one you have. Take one specific block of work and ask three questions.
- What generates it? Name the mechanism. Small orders under a minimum. A discount structure that invites negotiation. A configuration option that requires an engineer to review. If you cannot name the generator, you have not found the work — you have only found the symptom.
- Has the generator been changed? Not scheduled to be changed. Changed. Is the minimum order value live? Did the discount freeze take effect? Are those 187 accounts actually on credit-card-on-order, or is that on a slide?
- Has the volume of that work actually dropped, in a number, in the last sixty days? Order count, ticket count, expedite count. A real measurement, not an impression.
Three yeses and it is available. Anything less and it is occupied — and if you reallocate it, you are moving a person away from work that will follow them. That test takes about ten minutes per work block and it is the single highest-return ten minutes in the episode.
Why is the point not the cut?
The purpose of Zero-Up is not to cut. It is to reallocate — to move people, money and attention out of the parts of the business that do not produce profit and into the parts that do.
A Zero-Up that only produces a cut number was run by somebody who did not understand it.
If the output of your exercise is “we found four million dollars,” you got half of it. The output should be: four million dollars of capacity, moved to these three specific places, expected to produce this specific growth, owned by these specific people. The redeployment is the deliverable. The savings is the intermediate step.
Bill has seen a $400 million distributor redeploy $4 million of SG&A this way and put $12 million of EBITDA on the board in six months. The four million was not the win. Where it went was the win.
How do I start this week?
Three moves.
Move one — hand Zero-Up to your CFO with a date. This week, and as a conversation, not an email. The scope is the six-step build: split direct from indirect, set the burden rate, back direct labor out of COGS, isolate Quad 1 current state, build Quad 1 Growth, then layer in Quads 2, 3 and 4. The date is the part people get wrong, so be specific: give it a completion date that lands before your budget cycle starts, with enough room that it can become the budget rather than inform it. If your budget process kicks off in October, Zero-Up is finished in August. On the thousand-day clock, the Zero-Up plan is complete by Day 270 — which is exactly what happened in that $310 million business, and it was complete by Day 270 only because the simplification moves were done by Day 210. Write the date down, then say it out loud in a room with other people in it.
Move two — run the question on your three largest indirect cost pools. You do not have to wait for the full model to start the cultural work. For most businesses the three biggest pools are some combination of customer service, engineering support, finance and reporting, IT, or planning. Bring each leader in, one at a time, and ask the question — not “where can you cut fifteen percent,” but if we rebuilt this function today, for the business we actually have now, would we build it this way again? Then be quiet. This is a question that needs about eleven seconds of silence to work. What comes back, from good people, is a list: the report nobody reads, the approval step added after one incident in 2018, the three-week close process that exists because two systems do not talk, the customer segment generating sixty percent of the tickets and four percent of the revenue. Write all of it down and act on none of it in that meeting. You are gathering the map.
Move three — audit your own calendar against seventy-thirty for two weeks. The rule: schedule seventy percent of a normal executive week; the remaining thirty percent absorbs the unscheduled work. Hold the line on the seventy and the unscheduled fits. Lose it and the rhythm breaks within a quarter. So pull your calendar and measure what percentage of your hours were committed in advance. At ninety-five percent booked you do not have a busy calendar — you have a calendar with no capacity, and every unplanned thing displaces something that was on your plan. In practice it displaces the cadence, because the cadence is the only thing that does not complain when you move it. A calendar at ninety-five percent booked is fully occupied and zero percent available. And an occupied CEO cannot reallocate anything, including himself.
How do you move fast without moving wrong?
Zero-Up generates dozens of proposed moves, and treating them all the same means moving too slowly on everything or too fast on the wrong thing. Classify every proposed reallocation by reversibility.
Reversible moves go fast and they do not need consensus. Moving a person between teams. Changing a report’s distribution. Reassigning account coverage. Consolidating a meeting. If you can put it back in thirty days at near-zero cost, the right process is: decide it, do it, tell people. Do not build a business case for a decision you can undo — the cost of the analysis exceeds the cost of being wrong.
Irreversible moves get a decision rule and a named decider. Eliminating a role. Exiting a facility. Discontinuing a product line. Changing a customer’s terms in a way that ends the relationship. These you cannot cheaply undo.
A decision rule is written before the decision and it states the condition: “If Quad 4 order volume in this category is below X after two quarters of the new minimum order value, we discontinue the line.” Written first, so that when the moment arrives you are executing a decision instead of relitigating one — in a room where somebody is going to say “but that’s still four million dollars of revenue.”
And the named decider is one person. The committee gives input; one name signs.
Two tiers. Fast and quiet on reversible. Slow, written and owned on irreversible. That is it.
What is actually parked in the bottom quintile?
Twenty-seven percent of a company’s functional capacity was sitting in the bottom quintile of one $310 million business — serving customers producing about five percent of the revenue.
That is not a cost problem. That is an entire growth engine, parked, running, going nowhere.
Go find yours.
Frequently asked questions
What is Zero-Up budgeting? Zero-Up is Bill Canady’s method for rebuilding a company’s budget from zero rather than from last year’s numbers. It runs on one question — if we rebuilt this business today, would we build it this way again? — and on a six-step build: split direct from indirect labor, apply a burden rate, back direct labor out of COGS, isolate Quad 1 current state, build Quad 1 Growth, then layer in Quads 2, 3 and 4.
Why is incremental budgeting a problem? Because last year’s cost structure was never designed; it accumulated. Every dollar is approved once and then becomes baseline that nobody has to justify again, so the October conversation covers three or four percent of the cost structure while ninety-six percent passes unexamined. Baseline also gets multiplied, so the businesses with the worst cost structures grow them fastest. Last year plus five percent is how you lock in every bad decision you have ever made.
When in the 1,000-day clock should Zero-Up be run? Days 250 to 365, with the plan complete by Day 270 — and only after the simplification work is done, around Day 210. Sequence is the whole argument: you cannot reliably reallocate capacity until you have first freed it. Practically, Zero-Up also has to finish before the budget cycle starts, so that it becomes the budget rather than informs it.
What is the difference between occupied and available capacity? Occupied means the work still exists and something still generates it. Available means the work is gone — retired, priced away or moved to a channel — and the hours are genuinely open. They look identical in a model and nothing alike in a building. Test it with three questions: what generates the work, has the generator actually been changed, and has the volume dropped in a measured number over the last sixty days. Three yeses means available.
Who should own Zero-Up? The CFO. Finance owns the general ledger, so the numbers tie to the monthly close; finance owns the budget cycle, so Zero-Up becomes the budget instead of a study; and a Zero-Up owned by the CEO’s office ends when the CEO’s attention moves. Give your CFO the exercise and a date.
Is Zero-Up a cost-cutting exercise? No. The purpose is reallocation — moving people, money and attention out of the parts of the business that do not produce profit and into the parts that do. A Zero-Up that produces only a savings number was run by somebody who did not understand it. One $400 million distributor redeployed $4 million of SG&A this way and put $12 million of EBITDA on the board in six months; the redeployment, not the savings, was the win.
What is the 70/30 calendar rule? Schedule seventy percent of a normal executive week and let the remaining thirty percent absorb unscheduled work. A calendar booked to ninety-five percent has no capacity, so every unplanned thing displaces something already planned — usually the operating cadence, because it is the only item that does not complain when it is moved. A calendar at ninety-five percent is fully occupied and zero percent available.
Know the number the reallocation has to serve.
The Board’s Number calculator reconstructs the underwriting behind your deal — entry EBITDA, entry multiple, target MOIC, hold period — and solves for the exit EBITDA you actually have to deliver. That is the growth rate Quad 1 has to be built to support in step five. It takes about ten minutes.
Run the Board’s Number calculator
Related
- The 1,000-Day Framework — the full four-phase method
- Price First, Cost Last: The Five-Lever Bridge — the growth rate Quad 1 has to be built for
- The Complexity Tax: Why 4% of Revenue Eats 30% of Capacity — the simplification work that has to happen first
Full transcript
EP07 — Zero-Up: Rebuilding the Budget From Zero
[00:02] A thousand days. That’s enough time to transform a company, but not enough time to waste. Welcome to the 1,000day CEO, the podcast about decisive leadership, sustainable growth, and building a business that thrives beyond any one leader. Your host is Bill Canady. Let’s make every day count. >> You’re in a conference room with your CFO and 11 functional leaders, and on the screen is your next year’s budget. and somebody and it’s never a bad person. It’s usually your most conscientious VP says the sentence we took last year and we added 5%. Everybody nods, hey, that’s what we do. Maybe moves on. It’s the least controversial moment in the entire quarter. Who doesn’t like 5% growth a year? Low price, low market, it’s going to be fine. Well, I want you to think about what actually just happened in that room because it’s worth understanding precisely. Yeah, last year’s cost structure was not designed. It was accumulated. It’s the sum of every hiring decision made under pressure. Every headcount that got backfilled because it had always been there. Every function that grew because a customer complained loudly enough in 2019. Every process built to handle an exception that nobody has seen since. It is a sedimentary record of a decade of pressure and accommodation. And you just multiplied it by 1.05. 05% and called it a plan. H doesn’t feel that good now, does it? Well, here’s a line I’d like you to sit with a little bit. Last year plus 5% is how you lock in every bad decision you have ever made, plus all those who came before you. Because incremental budgeting is not a finance technique. It’s a memory device and remembers your mistakes perfectly and your intentions, not at all. Okay, here’s the proof. a $310 million industrial business that I ran 32% of it gross margins 8% Ebida somewhere around day 60 we ran into the capacity diagnostic we sat every function leader
[02:02] down and asked them one question what percentage of your team’s time goes to the bottom quentile of customers the lowest answer in the room was 18% the highest was 41 the average is 27 27% of the functional capacity of a 310 $10 million company consumed by customers producing about 5% of the revenue. Now, here’s the part that matters for today. We did not run a zero up on day 90. We ran the simplification work first. The minimum order value, the minimum order quantity at the skew level, the discount freeze on quad 4 book, the 187 accounts we moved to credit card on order over a single re weekend. Order count came down to 38. Gross margin per order went from 19 to 31. That’s pretty good. We’re starting to get somewhere. Then we ran to zero up. The plan was complete on day 270 and what it redeployed was at 27%. Which by then was actually free instead of theoretically free. Big difference. Here’s my promise. By the end of the next half hour, you will be able to hand your CFO a zero up build with a defined sequence and a date on it. You’ll know the one question that runs the whole exercise and you’ll be able to tell the difference between capacity you have and capacity you only think you have. And here’s the plan. Three move. But before we move, I have to give you the mechanics and the sequence because zero run the wrong order is worse than not running at all. So let’s do it right. This is the thousandday CEO. I’m Bill Canady. Let’s get into it. Let’s be precise about what incremental budgeting actually does to a business because the damage is specific. Every dollar in your cost structure was approved once by somebody for a reason, but it’s only approved once and after that first year it stops being a decision and becomes a baseline. Nobody has ever had to justify it again. The only thing ever has to justify is the change, the delta, what we’re going to grow this thing by. So your budget conversation every October
[04:04] is a conversation about three or 4% of your entire cost structure and 96% of it goes through and unexamined forever. Okay, think about what that means over a 5year period. The customer who justified that inside a sales team is gone. The product line that needed that engineer got discontinued. The reporting package that two people took them to produce goes to a distribution list where nobody has opened it since the last CFO. None of that shows up because none of it is a delta. It’s a baseline. Baselines are invisible. And here’s the compounding part. Baselines get multiplied. 5% on top of a bloated base is a bigger dollar number than 5% on top of a clean one. So the businesses with the worst cost structure grow their cost structures fastest. Man, that’s counterintuitive, but that’s how it works. Incremental budgeting is regressive. It rewards accumulated mess. So, zero up. Ask a different question. Not what should we add one question and it’s the whole exercise. If we rebuild this business today, what would we build it? And would we build it this way again? That’s it. That’s zero up. Everything else is just mechanics. If we rebuilt the business today, would we build it the same way again? And notice what that question does that a cost reduction target doesn’t do. A cost target asks people to defend their budget. This question asked them to design one. Those are completely different conversations and they produce predict completely different behavior. When you hand somebody a 15% reduction target, you get a negotiation. Why I need this, why I don’t need that. They bring you in three things you never cut, hoping you’ll flinch. When you ask someone to build their function from zero with the business you actually have now, most of them will hand you back something smaller than what you would have dared to ask for. I’ve watched it happen repeatedly and it still surprises me. Zero up challenges an organization to stop defending historical complexity. That’s the cultural work beneath the financial work. Because right now in
[06:05] your company at a significant number of very capable people are spending a significant portion of their week defending that decisions that were made before they even got there. They’re not even owned by them. They were made by people who are no longer with the company for customers that don’t even exist anymore. Now, let me name the cost of getting this wrong because there’s a version of this that fails badly. The failure isn’t running zero up. The failure is running it too early. And I want to give you the exact mechanism. You cannot reliably reallocate capacity until you first freed it. Run a zero up exercise on a quad forwardladen organization and you’ll discover that your redeployed people are still doing the old work. Here’s what that looks like on the ground. You run the exercise. It says your customer service function should be nine people instead of 14 and the five freed up people should go to a new inside sales motion covering your quad 2 accounts. Well, that’s great. You moved them. You announced it. There was a slide and then the phone rings. It’s the same tale of the small accounts placing the same $400 order needing the same expedite asking the same questions because you never change the terms, the minimums, the pricing or the service model that generated those costs. The work did not go away just because you moved the person. So now two things happen. Either the five people quietly drift back to doing their old work, which is typically what happens because they know how to do it. and now you’ve got a new sales motion on paper that isn’t happening or they don’t service and they collapse that for the tail. You get the blow up in the board meeting anyway except that now it’s a surprise instead of a decision. I don’t like surprises. That’s why zero up sets here in this season at day 250 to day 365 and not earlier. Episode 5 was a simplification work. The dirty dozen minimum order values the discount freeze retiring the tail. That episode had to come first. Not because it’s more important, but because it’s what makes this one true. Free the capacity. Then reallocate it. It’s that order every time. All right. The framework we’re going to work around.
[08:06] Let me give you the mechanics and I’m going to give them to you as an actual sequence because zero up fails more often on sequence than on analysis. There’s six simple steps. Step number one, split direct labor from indirect labor. That sounds like accounting housekeeping. I know. I know. I’ve said it myself. It is the foundation of everything that follows though. Direct labor is the hours that attach to the unit of output. Part made, an ordership, a job installed. Indirect labor is everything else. It’s the most middle market companies. These two are tangled together in inside of COGS and inside of departmental budgets in a way that makes it impossible to answer the only question that matters. How much labor does a given segment of my business actually consume? pretty straightforward. Sometimes hard to tease out if you got it all wrapped together. Until you split them, every segment of P&L you build is fiction with decimal places. Step two, apply the burden rate. Take your indirect labor and your facility and your equipment cost and turn them into a rate you can apply to direct labor hours. Very straightforward. Or whatever your true driver is, one rate, defensible, documented, fully burdened. You will get an argument here about precision. Somebody will want 12 burden pools. Don’t. A single defensible rate that everyone understand beats an elegant model that three people can explain and nobody trusts. You are not doing this for the auditors. You’re doing it to make a decision. This number’s for you, not to prove to someone else. Step three, back direct labor cost out of COGS. Now you see cost of goods sold as material in true variable cost with labor setting where it belongs as capacity you deploy rather than a cost that just happens to you. This is the step that changes how the leadership team thinks because the moment labor becomes capacity instead of cost. The question changes from how much does this cost to where is this going and where is this going is a question a
[10:06] CEO can act on. Here’s step four. Isolate quad one current state. Quad one, your fourth, those are your best customers buying your best products. Build as P&L as it exists today. Revenue, material, direct labor, burden, the specific SGNA that actually serves it. Do not build the aspiration. Build the current state, warts included. That’s right. Include the bad stuff. This is your baseline. It is what it is, and it’s the only baseline in this entire episode that you actually carry forward because it’s the only one you verify. Step five, build quad one growth. Now and only now you design. What does quad one growth need? What does it need to grow? What coverage? What service level? What inventory position? What engineering support? Build it from zero. Not from what quad one has today. From what quad one needs to grow at the rate your bridge says it has to grow. This is a step everybody wants to skip. It’s the one that creates the value because the output of step five is the demand signal for capacity. It tells you where the freed up people go before you free them up, which means what you do with them. There’s a destination. There’s a place for them to go. So much better. Step six, layer in quad 2, three, and four. Now, the rest of the business gets added on top of a structure that was designed around the profitable core rather than the core being whatever is left over after everyone else took what it wanted. And quad Ford gets built last. Now, this is deliberately because by the time you get there, you’re asking a very clarifying question. Given everything I’ve now allocated to quads one, two, and three, what am I actually willing to spend to serve this? Usually, the answer is a great deal less than what we currently do. That’s a good thing. Finance owns this, not strategy, not you. Now, this is important. I want to be empathetic about it that this is because it determines where zero up survives contact with next year. Your CFO owns Zero Up, not the strategy group, not a consultant, not the CEO’s office. Three
[12:08] reasons, and they’re all practical. One, finance owns a general ledger. Zero up is a recut of your actual accounts, if the person building it doesn’t control the source system, the numbers will not tie. And the first time a functional leader finds a variance between the zero up model and the monthly close, the entire exercise loses its authority and never gives it back. Two, finance owns the budgeting cycle. Who else? Zero up has become the budget, not a study that informs the budget. If it lives in a strategy deck, October arrives and somebody adds 5% the last year because that’s the process and the process wins every single time. The only way zero up six is if it is the process. Keep that in mind. Three, the CEO’s office is the wrong owner because zero up owned by the CEO is a zero up that ends when the CEO’s attention moves. And our attention moves all the time. We got a lot going on. And as your attention will move, you’ve got a bridge to turn, a team to build, and a board. Finance ownership is what makes it permanent instead of an initiative. Give your CFO the exercise and a date. That’s the mechanism. That’s what they’re there for, and they’re good at it. Occupied versus available. Now, here’s a distinction that determines whether any of these convert into dollars, and it’s one of the most often I see missed. You run the capacity diagnostic. A functional manager tells you she spends 30% of her week on bottom quartile accounts and the room hears 30% of that person is available for reallocation. H, that would be a no. You’d like to, but they’re already spoken for. She is not 30% available for reallocation. Instead, she is 30% occupied. Occupied means the work still exists and someone something or whatever is still generates it. Available means the work is gone, retired, priced away or moved to a channel that handle handles it and the hours are genuinely open. Occupied capacity looks exactly like available capacity on a spreadsheet. They are indistinguishable
[14:09] in a model. They are completely different inside the building. So, here’s how you test which one you have. Take one specific block of work and ask three questions. One, what generates it? Name the mechanism. Small orders under a minimum, a discount structure that invites negotiation, a configuration option that requires an engineer to review. If you cannot name the generator, you have not found the work. You’ve only found the symptom. Two, has the generator been changed? Not scheduled to be changed, changed, actually changed. Is the minimum order value live? Did the discount freeze take effect? Are those 187 accounts actually on credit card on order or is that on a slide? And let me tell you, they get on a slide a lot. Three, as the volume of the work actually dropped in a number in the last 60 days. Order count, ticket count, expedite count, a real measurement, not an impression. Three, yeses, it’s available. Anything less, it’s occupied and you have to reallocate it if you will be able to move that person away from that work and it will follow them. So if they still got it, it’s going to follow them no matter what you do unless you march them out the door. Better to get rid of the work. That test takes about 10 minutes per work block and it’s the single highest return 10 minutes in this entire episode. One more thing before we get to the plan, and it’s the thing that I want most to land. The purpose of zero up is not to cut. It’s to reallocate. To move people, money, and attention out of the parts of the business that do not produce profit and into the parts that do. A zero up that only produces a cut number was run by somebody who didn’t understand it. And if the output of your exercise is we found $4 million, you got half of it. The output should be $4 million of capacity move to these three specific places expected to produce this specific growth amount owned by these specific people. The redeployment then is a deliverable. This savings is just the intermediate step. You don’t want just savings, you want to grow this baby. And in order to do that, got to
[16:09] have the resources available. I’ve seen a $400 million distributor redeploy $4 million of SGNA this way and put $12 million of Ebidal on the board in the next 6 months. That’s right. Those resources get converted to growth. The 4 million was not the win. It was where it went when we got the win. The plan that we’re going to deliver. Here’s the three moves. Move one, hand zero up to your CFO with a date this week, a conversation, not an email. An email is necessary. Not sufficient. The scope is a six-step build. Split direct from indirect. Set the burden rate. Back direct labor out of COGS. Isolate quad one current state and build quad one growth. Then layer in quads 2, three, and four. Just do the same thing again. The date is the part people get wrong. So, let me be specific. Give it a completion date that lands before your budget cycle starts. If you wait, it will get baked in with enough room that it can become the budget rather than inform it. If your budget process kicks off in October, Zero Up needs to be finished in August. And if you are running a thousand-day clock the way I’ve laid it out, the zero up plan is complete by day 270, which is exactly what we did in that $310 million business. And it was complete by day 270 only because simplification moves were done by day 210. Write that date down. Now say it out loud in a room with other people in it. Move number two, run the questions on your three largest indirect cost. You don’t have to wait for the full model to start the culture work. Take your three biggest indirect cost pools for most businesses that same combination of customer service, engineering support, finance, and reporting, it planning. Bring each leader in one at a time and ask them a question. Not where you can cut 15%. The question is this. If we rebuilt this function today for the business we actually have now, would we build it the same way? H then be quiet. Just sit there. Let them wrestle with that. This is the question that needs about 11 seconds of silence to work. When you get back from good people is a list that
[18:10] reports nobody reads. The approval step that was added after one incident in 2018. The 3-week close process that exists because two systems didn’t talk. the customer segment that generates 60% of the tickets and 4% of the revenue. Write it all down and do not act on any of it in that meeting. You gathering the map here, but you walk out of three conversations knowing more about your cost structure than the last three budget cycles told you. That’s a big deal. Third, move audit your own calendar against 7030 for 2 weeks. Here’s the personal level version of the same discipline, and I’d argue it’s the one that most will change your next quarter. The rule is this. Schedule 70% of a normal executive week. The remaining 30% absorbs the unscheduled work. Hold the line on the 70 and the unscheduled fits. Lose the line and the rhythm breaks for the quarter. So for two weeks, pull down your own calendar and measure what percentage of your working hours were committed in advance. If you’re at 95% booked, you do not have a busy calendar. You have a calendar with no capacity and every unplanned thing that arrives is going to displace something that was actually on your plan which in practice means it depes the cadence because the cadence is the only thing on your calendar that doesn’t complain when you move it. Same principle as the whole episode. A calendar at 95% booked is fully occupied and 0% available. And an occupied CEO cannot reallocate anything including himself. Keep that in mind if you’re all jammed up. Got to find time. Got to find time you’re going to get things done. One more piece of the mechanics because zero up generates dozens of proposed moves. And if you treat them all the same, you will either move too slowly on everything or too fast on the wrong things. Classify everything proposed right by reallocation by reversibility. Reversibility means that you can go fast and they do not need to be a consensus. Moving a person between teams, changing reports, distribution, reassigning account coverage, consolidating a
[20:12] meeting. If you can put it back in 30 days, it needs near zero cost. The right process is decide it, do it, tell people. Do not build a business case for a decision you can undo easily. The cost of the analysis exceeds the cost of being wrong. Irreversible moves get a decision rule and a name decider. It’s bigger because you can’t get out of it easily. eliminating a role, exiting a facility, discontinuing a product line, changing a customer terms in a way that ends the relationships. You cannot cheaply put those back together. Humpty Dumpty falls off the wall, going to be hard to put it back together again. A decision rule is written before the question and it states the condition. If quad four order volume in this category is below X after two quarters of the new minimum order value, we discontinue the line. write it first so that when the moment arrives, you’re executing a decision and instead of reitigating one in a room where somebody is going to say, “But that’s still $4 million of revenue.” It’s always going to happen. At the name decider is one person, not the committee. A committee gives input, one person signs their name. Two tiers, fast and quiet on the reversible. Just do it and see if anyone complains and see what the outcome is. Slow and written and owned on the irreversible. That’s it. Fast and quiet on reversible, slow and written on irreversible. Two things worth keeping from this one. One, last year’s 5% is how you lock in every bad decision you ever made. Incremental budgeting is not a finance technique. It’s a memory device and it remembers your mistakes perfectly and your intentions not at all. The replacement is one question. If we rebuilt the business today, would we build it in the same way again? Two, sequence the whole argument. You cannot reliably reallocate capacity until you have first freed it. Run zero up on quad core laden organization and your redeployed people will still be doing the old work because the work never left. The only the org chart did simplify first then reallocate. Day 210 then day 270. Three
[22:15] 30% of a manager’s week spent on bottom quartile accounts is not 30% available. is 30% occupied and available look identical in your model and nothing alike when you actually sitting in the chair. And the difference between them is whether you change the thing that generates the work. And the point is not to cut. Say that back to yourself before you walk into the first review. The point is not to cut. A zero up that produces only a savings number was run by someone who didn’t understand it. that the deliverable is a destination. Capacity moved to where the profit lived owned by a name with a number attached. 27% of a company’s functional capacity was sitting at the bottom of a quartile of one to $310 million business. That’s not a cost problem. That’s an entire growth engine parked, running, and going nowhere. Go find yours. Next week, we’re going to cross into phase three. That’s day 366. That’s the flywheel. That’s where we start with the thing that decides whether any of it survives you. It’s the rule of three. The visionary, operator, and profit. Three roles every company needs and one of them is missing in about 90% of the businesses I walk into. I’ll tell you which one and why it’s absence is the single most expensive problem in a middle market company and how to know within one meeting whether you’re the one filling a seat you shouldn’t be sitting in. If you want these tools and others, you can always go to the 8020 Institute. there. You can sign up and take a lot of these classes there. I think you’ll find you’ll like them. Hope you enjoy me. You can find me on bill candy.com. This is exciting work. It makes a huge difference in your business. I’m Bill Canady. Now go do that work. >> You’ve been listening to the 1000day CEO with Bill Canady. Follow the show for more decisive leadership, sustainable growth, and strategies that build enduring businesses. Until next time, make every day count.
