The 80/20 Principle. The Secret to Achieving More with Less
By Richard Koch
Crown Publishing / 336 pages / $21
If it feels like you spend an inordinate amount of time working for an unequal amount of reward or output, you’re not crazy. It’s the 80/20 Principle at play.
Also known as the Pareto Law, the Principle of Least Effort, or the Principle of Imbalance, the pattern was discovered in 1897 by Italian economist Vilfredo Pareto and, simply stated, it means that 80 per cent of results or outputs flow from 20 per cent of causes or inputs.
In The 80/20 Principle: The Secret to Achieving More with Less, author Richard Koch says the 80/20 principle can be used to optimize 10 key business functions, including strategy, quality, cost reduction, and decision-making and analysis.
For farm owners or managers, optimizing business functions always boils down to how you can generate the most money with the “least expenditure of assets and effort.” Koch says — almost heretically — that traditional approaches and strategies are wrong.
“Business strategy should not be a grand and sweeping overview. It should be more like an underview, a peek beneath the covers to look in great detail at what is going on. To arrive at a useful business strategy, you need to look carefully at the different chunks of your business, particularly at their profitability and cash generation.”
With the 80/20 approach, he says you’ll quickly notice that the most revenue comes from a small part of your business activity. Therefore, Koch says you should turn your company upside down (think inverted pyramid) and concentrate your efforts on multiplying that small portion.
Koch says we should identify the areas that have the greatest cost-reduction potential and concentrate 80 per cent of our efforts there, and he explains that reducing costs through 80/20 means three things: “simplifying” by eliminating unprofitable activities, “focusing” on only a few key drivers of improvements, and “triggering” performance comparisons.
He also discusses the cost of complexity. In terms of business size, he says that bigger is not always better, but rather the ideal is bigger and simpler since “the problem is not scale, but the complex systems and processes that typically accompany scale… Additional scale, without additional complexity, will always give lower unit costs… Waste thrives on complexity.” (For more on balancing business waste with productivity, check out the book review on Lean Management for Country Guide.)
And it’s not just about 80/20 analysis either. Koch says that you have to engage in 80/20 thinking: “We must constantly ask ourselves: what is the 20 per cent that is leading to 80 per cent… Action from 80/20 thinking should lead us to get much more from much less,” helping you jettison the underperforming 80 per cent of inputs that contribute to only 20 per cent of your output.
“Always try to identify the simplest 20 per cent of any product, process, channel, design or service delivery… mechanism,” Koch says. “Cultivate the simplest 20 per cent. Refine it until it is as simple as you can make it… Pass up the thrills, bells and whistles. Make the simplest 20 per cent as high-quality and consistent as imaginable. Whenever something has become complex, simplify it; if you cannot, eliminate it.”
A word of warning: If you can get through the first few chapters, where he delves into the mathematical theory behind the principle, you will gather valuable insights into how to shift from simple data gathering and analysis to leveraging 80/20 thinking to optimize business decision-making around problems and opportunities.
There’s something for everyone in this book: business managers and sales and marketing strategists; businesses considering scaling up; those wishing to optimize project and time management; as well as a few chapters on how you can apply 80/20 principles to your personal life, relationships, and career goals.
The most important lesson throughout is to “keep the ‘vital few’ in the forefront of your brain. And keep reviewing whether you are spending more time and effort on the vital few rather than the trivial many,” because “truly effective people and organizations batten on to the few powerful forces at work in their worlds and turn them to their advantage.”