The 80-20 rule says, approximately 80% of the outcomes come from 20% of our activities. In any set of things (people, customers, employees, skills etc.) a few (20%) are vital and the majority (80%) is trivial. For example, 80% of a company’s sales may come from 20% of its vital customers. 20% of your marketing staff brings 80% of your sales. 20% of your employees may be causing 80% of your problems. The rule works in both directions. It can identify the stars as well as the spoilers, the vital as well as the trivial. This rule which was propounded by management consultant Joseph M. Juran is also known as ‘The Law of the Vital Few’ or ‘The Pareto Principle’ named after Italian sociologist and economist Vilfredo Pareto. Pareto had observed in 1906 that 80% of the land in Italy was owned by 20% of the population. The 80-20 rule has since been discovered to be dominant in various fields like business, science, government, social, personal etc. This is the reason the rule is considered immensely important by management thinkers for prioritizing. The rule should not be seen strictly as a fixed ratio of 80:20, but approximately so. In certain cases, it can be 75-20 or even 95-10. The ratio should not be of much concern. It need not add up to 100% either, as both the variables are different. The primary point to be taken is recognition of - the vital and trivial, the stars and spoilers.
A few Examples may be:
1. 20% of the products contribute 80% to the company’s profits.
2. 20% of your advertisements ring in 80% of your sales.
3. 25% of the items in the Profit and Loss A/c and Balance Sheet add up to 80% of the total.
4. The first 10% and last 10% work of a project consumes 80% of the total project time.
5. Students complete 80% of their studies in 20% of the semester time.
6. 2-20% of the total number of Companies control 75-95% of the market for a product.
7. The credit for the functioning of ‘The Government Machinery’ in India goes to 20% of Government Servants who are relatively honest and sincere.
8. 80% of the laws are passed and schemes are announced in the year of the election.
9. 80% of the wealth in the country is owned by 20% of the people.
10. We spend 80% of our leisure time with a small number of our friends and relatives. These few are the special ones in our lives.
11. If 80% of your happiness is coming from a very small number of people, activities, and events in your life: it’s time to contemplate.
And so on…
Lessons to be taken:
1) Focus for optimal resource utilization: The Pareto principle helps us to stay focused on the effective 20% that matters the most. This 20 % can be your skills, expertise, people in your life, experiences in your life, customers, employees etc. Businesses can generate spectacular growth by focusing on these effective areas. Take for example – 20% of your critical customers are contributing 80% to your firm’s profit. First, give better services to these critical customers. Second, set a goal and make a plan to increase the number of such critical customers. Applying the 80-20 rule is the simplest way for releasing your resources for better alternative use. Resources like time, capital, space, human resource, technology, machinery etc. are scarce. Identify the scarce resources as consumed by the 80-20 activities. The scarce resources should be put to optimal use to generate maximum advantage to the organization.
2) Say ‘No’: Once the 80-20 rule is understood, it becomes amply clear that everything in life and business is not important. Similarly, everything is not a priority. You have to choose from. Being able to say ‘no’ is very important in attracting what you really want. The next step is to fix or discontinue problematic products, services or people. For example - If you want to give better service to your 20% critical customers, you have to arrange for the resources. These resources can be freed by declining to do business with some of the 80% non-critical customers who may be causing 80% of the troubles. If anything on your ‘to do’ list has to fall by the wayside, make sure it is not from the 20% effective side.
3) Beware of Perfectionism: Except for the field of art, we should understand that many a time good enough is good enough. It is widely observed that 80% of the work is completed in 20% of the total time taken. The remaining work takes unduly long time largely because of perfectionism or procrastination. Undue attention to irrelevant details is the mark of a perfectionist. Small things keep on multiplying. The same pattern goes for simple tasks like the drafting of letters, writing emails, cleaning the house, planning a vacation etc. A Perfectionist lacks self-confidence. There is no greater waste of time as doing perfectly what should not be done at all. Voltaire said, “Perfect is the enemy of good.” Good enough should be good enough.
4) Controls and Checks: It is very difficult to control all the things all the time. You can either control some things all of the time or all things some of the time. Once you know where 80% of your income comes from, which 20% items constitute a majority of your expenses, which 20% stock items are moving the most, which are the critical 20% activities – you can apply advanced controls on these selected few.
5) Is it 96-36 in your case?: An important inference from the 80-20 rule is: “If 80% of achievements are a result of 20% of inputs, a logical extension too might be evident in some fields where 96% (80% + 80% of 20%) of the achievements are a result of 36% (20% + 20% of 80%) of inputs. So you can save up to 64% (100% - 36%) of your efforts by sacrificing just 4% (100% - 96%) of the results. Is 96-36 applicable in your case? If so, it is imperative for you to take action for prioritizing and freeing up resources for better use.
6) Working Hard to Working Smart: Working hard doesn’t necessarily generate higher output. Working smart does. If you work less and achieve more, that is a double win. With 80-20 analysis it is easy to figure out 7777777777777777777777777777777777777777777777777777777777what is menial and a decision for discontinuing or outsourcing the same can be taken. By doing so if you are able to free some time, don’t feel guilty to relax. Effective people are a little lazy. This relaxing time gives you the mental space to think about what is really important for you. You cannot think about growth and strategies when you are endlessly busy. You cannot reflect upon your life and the direction in which your life is heading when you are too busy doing the routines. You can also free some time to do what you love to do.
Love,
Mahendra Chaturmutha.
