The 80/20 Principle: The Secret of Achieving More With Less

Every now and then, you will come across a book that gives you the "WOW" feeling after you have read it. I have that feeling after reading "The Black Swan", "Fooled by Randomness", "Who Says Elephant Can't Dance", etc. Well, I would rank this book by Richard Koch to be among the must read books on business and management. The term 80/20 principle or Pareto Law is so commonly used in daily business and management situations and the realisation of this principle and putting it into practice is what separates effective managers and leaders from those struggling to make the leap to the next step. The relevance of the principles highlighted in the book is more pronounced in the new digital age given that everything is moving at breakneck speed and things are supposed to be completed "yesterday". It also seems to appear that the world is moving towards the ratio of 90/10 or even 95/5 from 80/20 but regardless of the actual ratio, it serves to remind us how the world works and things are not proportionate and we should wise up and focus our limited energy and resources on things that matters.

 

As usual, the following are some of the exerpts from the book which I find useful and I hope you will find it useful too (words in BLUE are my own opinions):

1) ...... what happens first, even something ostensibly trivial, can have a disproportionate effect.

2) A small lead early on can turn into a larger lead or a dominant position later on,........

3) Improving on nature, refusing to accept the status quo, is the route of all progress: evolutionary, scientific, social and personal. George Bernard Shaw put it well: 'The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.' (I have earlier posted a section from the book by Alan Axelrod (Gandhi, CEO) titled "Get Ready to be a Lonely Leader" and the above statement reminds us that the road to greatness can sometimes be lonely)

4) Long-term clients tend not to be price sensitive. (Richard Koch reminds us it is more worthwhile to focus on existing or long-term clients)

5) Choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves.

6) Only do the thing we are best at doing and enjoy most.

7) The 80/20 Principle applied to business has one key theme - to generate the most money with the least expenditure of assets and effort.

8) A product has only to be 10 percent better value than that of a competing product to generate a sales difference of 50 percent and a profit difference of 100 per cent. (This is true in almost every aspects of life from business to sports. Teams that qualified for Champions League may be 10% better than teams that don't but in terms of revenue, teams that qualified stand to reap extra revenue of up to 90% more (90/10 ratio) and that is why it can make or break a team depending on qualifications to the lucrative Champions League. Note: The ratio is only an example which I am making up from gut feeling and not based on actual numbers).

9) If you can identify where your firm is getting back more than it is putting in, you can up the stakes and make a killing. Similarly, if you can work out where your firm is getting back much less than it is investing, you can cut your losses.

10) Outsourcing is a terrific way to cut complexity and costs. The best approach is to decide which is the part of the value-adding chain (R&D-manufacturing-distribution-selling-marketing-servicing) where your company has the greatest comparative advantage - and then ruthlessly outsource everything else. (This statement is easy to understand. We all have limited time and resources and as such, it is best to focus in the area where we can do our best. In my opinion, there is an optimum size for a given company to balance between being overly complex which may results in loss of focus and inefficiency but at the same time, an optimum size to spread fixed cost, e.g. overhead costs. The same principle also applies to each individual. We should focus on the part which we can value-add and delegates the rest.)

11) All organizations, especially large and complex ones, are inherently inefficient and wasteful. They do not focus on what they should be doing. They should be adding value to their customers and potential customers. Any activity that does not fulfil this goal is unproductive.

12) Note that there are always apparently good reasons trotted out as to why you need the unprofitable 80 per cent of products, in this case the fear of 'losing stature' by having a smaller product line. Excuses like this rest on the strange view that shoppers like to see a lot of product they have no intention of buying which distracts attention from the product they like to buy. Whenever this has been put to the test, the answer in 99 per cent of cases is that delisting marginal products boosts profits while not harming customer perceptions one jot.

13) ..... do not start your project until you have stripped it down to one simple aim. (Focus, focus, focus).

14) Faced with an impossible time scale, [project members] will identify and implement the 20 percent of the requirement that delivers 80 percent of the benefit. Again, it is the inclusion of the 'nice to have' features that turn potentially sound projects into looming catastrophes.

15) In the planning phase, write down all the critical issues that you are trying to resolve. (If there are more than seven of these, bump off the least important). Construct hypotheses on what the answers are, even if these are pure guesswork (but take your best guesses). Work out what information needs to be gathered or processes need to be completed to resolve whether you are right or not with your guesses. Decide who is to do what and when. Replan after short intervals, based on your new knowledge and any divergences from your previous guesses.

16) Impatient people don't make good negotiators.

17) One of the most important decisions someone can make in life is their choice of allies.

18) Productivity on most projects could be doubled simply by halving the amount of time for their completion.

19) Hard work leads to low returns. Insight and doing what we ourselves want lead to high returns.

20) ..... make everyone repeat back to him what they were going to do.

21) Once in your profession, if making money is really important to you and if you are any good at what you do, you should aim to become self-employed as soon as possible and, after that, to start to employ others.

22) Spend your time and emotional energy reinforcing and deepening the relationships that are most important.

23) You alone cannot make yourself successful. Only others can do that for you. What you can do is to select the best relationships and alliances for your purposes.

24) Spend more time with the contacts you enjoy, particularly if they can also be useful to you.

25) 10 golden rules for career success:

i) Specialize in a very small niche; develop a core skill.
ii) Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
iii) Realize that knowledge is power
iv) Identify your market and your core customers and serve them best
v) Identify where 20 percent of effort gives 80 percent of returns
vi) Learn from the best
vii) Become self-employed early in your career
viii) Employ as many net value creators as possible
ix) Use outside contractors for everything but your core skill
x) Exploit capital leverage

26) Increasingly, the most important class distinction in advanced societies is not ownership of land or even of wealth, but ownership of information.

27) Whether you are employed, self-employed, a small or large employer or even the head of state, you have core customers on whom your continued success depends.

In summary, this is a good book as it opened up my mind that I should focus my limited time and energy on the important 20% that will give me 80% of the results. This is important as we move up the management chain as time would be a major constraint and we need to focus our energy and resources on value-added works and not bogged down by "routine" works. It is important for any manager/leader to be able to make this leap or else, they will be held back in their progress and to me, this book certainly helps.