The 80/20 Principle: The Secret to Achieving More with Less
Richard Koch
PREFACE TO THE EXPANDED AND UPDATED VERSION
The new Chapter 17 says what networks and network businesses are, and why nobody in their right mind—if they are ambitious—would work for anything but a network or a network business.
There is one more thing that I have discovered. The greatest manifestation of 80/20 was not included in the early editions of this book. A new Chapter 16 describes “Your Hidden Friend,” which can exert a super-potent and amazingly favorable influence on your life. The hidden friend operates at extraordinary speed and impact for no conscious effort at all. And properly trained, your hidden friend can transform your life. This requires a little effort—the trick is to know how to do the training, the coding, of your hidden friend. Chapter 16 describes how.
PART ONE: OVERTURE
CHAPTER 1: WELCOME TO THE 80/20 PRINCIPLE
WHY THE 80/20 PRINCIPLE IS SO IMPORTANT
The French economist J-B Say coined the word “entrepreneur” around 1800, saying that “the entrepreneur shifts economic resources out of an area of lower productivity into an area of higher productivity and yield.”
A GUIDE TO THIS GUIDEBOOK
Chapter 2 explains how you can put the 80/20 Principle into practice and explores the distinction between 80/20 Analysis and 80/20 Thinking, both of which are useful methods derived from the 80/20 Principle. 80/20 Analysis is a systematic, quantitative method of comparing causes and effects. 80/20 Thinking is broader, less precise, and more intuitive procedure, comprising the mental models and habits that enable us to hypothesize what are the important causes of anything important in our lives, to identify these causes, and to make sharp improvements in our position by redeploying our resources accordingly.
CHAPTER 2: HOW TO THINK 80/20
WHAT THE 80/20 PRINCIPLE CAN DO FOR YOU
Since there were too many colleagues in the consultancy who were smarter than me, I moved to another U.S. strategy “boutique.” I identified it because it was growing faster than the firm I had joined, yet had a much smaller proportion of really smart people.
Who you work for is more important than what you do
The second key insight the consulting firm had was that in any client, 80 percent of the results available would flow from concentrating on the 20 percent of the most important issues.
Wealth from investment can dwarf wealth from working
As Chapter 14 will show, 80 percent of the increase in wealth from most long-term portfolios comes from fewer than 20 percent of the investments. It is crucial to pick this 20 percent well and then concentrate as much investment as possible into it. Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk.
PART TWO: CORPORATE SUCCESS NEEDN’T BE A MYSTERY
CHAPTER 5: SIMPLE IS BEAUTIFUL
The truth is that the unprofitable business is so unprofitable because it requires the overheads and because having so many different chunks of business makes the organization horrendously complicated. It is equally true that the very profitable business does not require the overheads, or only a very small portion of them. You could have a business solely composed of the profitable business and it could make the same absolute returns, provided that you organized things differently.
And why is this so? The reason is the same. It is that simple is beautiful. Business people seem to love complexity. No sooner is a simple business successful than its managers pour vast amounts of energy into making it very much more complicated. But business returns abhor complexity. As the business becomes more complex, its returns fall dramatically. This is not just because more marginal business is being taken. It is also because the act of making a business more complex depresses returns more effectively than any other means known to humanity.
SIMPLE IS BEAUTIFUL EXPLAINS THE 80/20 PRINCIPLE
- Finally, where a chunk of business is simple, the chances are that it is closer to the customer.
More is worse
The road to hell is paved with the pursuit of volume.
At this point it is worth asking: why do supposedly profit-maximizing organizations become complex, when this plainly destroys value?
One important answer, alas, is that managers love complexity. Complexity is stimulating and intellectually challenging; it leavens boring routine; and it creates interesting jobs for managers. Some people believe that complexity obtrudes when no one is looking. No doubt —but complexity is also sponsored by managers, just as it sponsors them.
Because business is wasteful, and because complexity and waste feed on each other, a simple business will always be better than a complex business. Because scale is normally valuable, for any given level of complexity, it is better to have a larger business. The large and simple business is the best.
The way to create something great is to create something simple. Anyone who is serious about delivering better value to customers can easily do so, by reducing complexity.
CHAPTER 6: HOOKING THE RIGHT CUSTOMERS
Marketing, and the whole firm, should devote extraordinary endeavor toward delighting, keeping forever, and expanding the sales to the 20 percent of customers who provide 80 percent of the firm’s sales and/or profits.
In contract management:
Remember the old 80/20 rule. Keep in closest contact with the 20 percent of your clients who give you 80 percent of your business. Every Sunday evening, go through contract management files and jot a note, send a card, or make a note to call anyone you haven’t had contact with for too long.
Since 1994 American Express had conducted many campaigns to strengthen its franchise with the merchants and their customers who generate the highest volume of Amex sales. Carlos Viera, director of sales for American Express in South Florida, explains:
Four steps to lock in your core customers
You cannot target the key 20 percent until you know who they are. Firms with a finite customer base can work this out individual customer by individual customer. Firms selling to tens of thousands or millions of consumers need to know who their key customers are (these might be channels of distribution) and also the profile of the heavy and frequent consumer.
Second, you need to provide exceptional or even “outrageous” service to them. To create a super insurance agency of the future, advises consultant Dan Sullivan, “you’d build 20 relationships and cover them like a run with service. Not regular service, not good service. Outrageous service. You’d anticipate their needs when you could and you’d rush like a SWAT team when they ask you for anything else.” The real key is to provide surprising service, above and beyond the call of duty and quite out of line with prevailing industry standards. This may have a short-term cost but it will have a long-term reward.
Third, target new products and services at the core 20 percent of customers, developing them solely for and with this group. In seeking to gain market share, try above all to sell more to your existing core customers. This is not, generally, a matter of sheer selling skills. Nor is it largely a matter of selling more existing products to them, although frequent-buyer programs nearly always give a high return and raise both short- and long-term profits. But much more important still is developing improvements to existing products, or developing totally new products, that are wanted by, and if possible developed in liaison with, your core customers. Innovation should be grounded in the relationship with this group.
Finally, you should aim to keep your core customers forever. Your core customers are money in the bank. If any of them drops out, your profitability will suffer. It follows that quite extraordinary efforts to keep your core customers, that look as though they are depressing profitability, are bound to enhance substantially over any meaningful time period. Exceptional service may even help short-term profits, by encouraging core customers to buy more. But profitability is only a scorecard providing an after-the-fact measure of a business’s health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case. If you start to lose core customers, the business is crumbling beneath your feet, whatever you do to dress up short-term earnings. If core customers are deserting, sell the business as fast as you can, or fire the management —fire yourself if you are the boss —and take whatever drastic steps are necessary to win the core customers back or at least stop the attrition. Conversely, if the core customers are happy, the long-term expansion of the business is assured.
CHAPTER 7: THE TOP 10 BUSINESS USES OF THE 80/20 PRINCIPLE
- The doctrine of the vital few and the trivial many: there are only a few things that ever produce important results.
- Most good events happen because of a small minority of highly productive forces; most bad things happen because of a small minority of highly destructive forces.
Therefore, build up a long list of spurious concerns and requirements early in a negotiation, making them seem as important to you as possible. These points must, however, be inherently unreasonable, or at least incapable of concession by the other party without real hurt (otherwise they will gain credit for being flexible and conceding the points). Then, in the closing stages of the negotiation, you can concede the points that are unimportant to you in exchange for more than a fair share of the really important points.
It also seems true that on account of the incredible pressure that can put on a negotiation, 80 percent of the concessions … will occur in the last 20 percent of the time available. If demands are presented early on, neither side may be willing to yield, and the entire transaction can fall apart. But if additional demands or problems surface in the final 20 percent of the time available for negotiation, both sides will be more flexible.
How to secure a pay raise
Orten Skinner gives an intriguing example of how to exploit the 80/20 principle:
80 percent of concessions will be made in the last 20 percent of negotiating time. If your appointment to ask for a long-overdue raise is scheduled for 9:00 a.m. and you know your supervisor has another appointment at 10:00, expect the critical moments to occur around 9:50. Pace yourself accordingly. Don’t make your request too early to permit a gracious compromise on your supervisor’s part.
CHAPTER 8: THE VITAL FEW GIVE SUCCESS TO YOU
A few things are always much more important than most things
PART THREE: WORK LESS, EARN AND ENJOY MORE
CHAPTER 9: BEING FREE
80/20 THINKING IS UNCONVENTIONAL
The power of the 80/20 Principle lies in doing things differently based on unconventional wisdom.
80/20 THINKING IS HEDONISTIC
Most people fall into one or more of the following traps. They spend a lot of time with people they do not much like. They do jobs they are not enthusiastic about. They use up most of their “free time” (incidentally an anti-hedonistic concept) on activities they do not greatly enjoy. The reverse is also true. They do not spend time with people they like most; they do not pursue the career they would most like; and they do not use most of their free time on activities they enjoy most. They are not optimists, and even those who are optimists do not plan carefully to make their future lives better.
“Hedonism” is often held to imply selfishness, a disregard for others, and a lack of ambition. All this is a smear. Hedonism is in fact a necessary condition for helping others and for achievement. It is very difficult, and always wasteful, to achieve something worthwhile without enjoying it. If more people were hedonistic, the world would be better and, in all senses, a richer place.
80/20 THINKING BELIEVES IN PROGRESS
80/20 Thinking is inherently optimistic because, paradoxically, it reveals a state of affairs that is seriously below what it should be. Only 20 percent of resources really matter in terms of achievement. The rest, the large majority, are marking time, making token contributions to the overall effort. Therefore, give more power to the 20 percent, get the 80 percent up to a reasonable level, and you can multiply the output.
80/20 THINKING COMBINES EXTREME AMBITION WITH A RELAXED AND CONFIDENT MANNER
We have been conditioned to think that high ambition must go with thrusting hyperactivity, long hours, ruthlessness, the sacrifice of both self and others to the cause, and extreme busyness. In short, the rat race. We pay dearly for this association of ideas.
Most of what any of us achieve in life, of any serious degree of value to ourselves and others, occurs in a very small proportion of our working lives. 80/20 Thinking and observation make this perfectly clear. We have more than enough time. We demean ourselves, both by lack of ambition and by assuming that ambition is served by bustle and busyness. Achievement is driven by insight and selective action. The still, small voice of calm has a bigger place in our lives than we acknowledge. Insight comes when we are feeling relaxed and good about ourselves. Insight requires time—and time, despite conventional wisdom, is there in abundance.
80/20 INSIGHTS FOR INIDVIDUALS
- Our lives are profoundly affected, for good and ill, by a few events and a few decisions. The few decisions are often taken by default rather than conscious choice: we let life happen to us rather than shaping our own lives. We can improve our lives dramatically by recognizing the turning points and making the decisions that will make us happy and productive.
- Everyone can achieve something significant. The key is not effort, but finding the right thing to achieve. You are hugely more productive at some things than at others, but dilute the effectiveness of this by doing too many things where your comparative skill is nowhere near as great.
- Few people take objectives really seriously. They put average effort into too many things, rather than superior thought and effort into a few important things. People who achieve the most are selective as well as determined.
CHAPTER 10: TIME REVOLUTION
- Most of any individual’s significant achievements—most of the value someone adds in professional, intellectual, artistic, cultural, or athletic terms—is achieved in a minority of their time. There is a profound imbalance between what is created and the time taken to create it, whether the time is measured in days, weeks, months, years, or a lifetime.
- Similarly, most of an individual’s happiness occurs during quite bounded periods of time. If happiness could be accurately measured, a large majority of it would register in a fairly small proportion of the total time and this would apply during most periods, whether the period measured was a day, week, month, year, or a lifetime.
- The 80/20 Principle says that we should act less. Action drives out thought. It is because we have so much time that we squander it. The most productive time on a project is usually the last 20 percent, simply because the work has to be completed before a deadline. Productivity on most projects could be doubled simply by halving the amount of time for their completion. This is not evidence that time is in short supply.
Here are seven steps to detonating a time revolution.
Make the difficult mental leap of dissociating effort and reward
Give up guilt
Do things that you like doing. Make them your job.
Free yourself from obligations imposed by others
It is a fair bet that when 80 percent of time yields 20 percent of results, that 80 percent is undertaken at the behest of others.
The 80/20 Principle shows time and time again that the 20 percent who achieve the most either work for themselves or behave as if they do.
Be unconventional and eccentric in your use of time
Identify the 20 percent that gives you 80 percent
For happiness, identify your happiness islands: the small amounts of time, or the few years, that have contributed a quite disproportionate amount of your happiness.
Repeat this whole procedure for achievement. Identify your achievement islands: the short periods when you have achieved a much higher ratio of value to time than during the rest of your week, month, year, or life.
Multiply the 20 percent of your time that gives you 80 percent
Eliminate or reduce the low-value activities
THE TOP 10 LOW-VALUE USES OF TIME
The Top 10 low-value uses of time
- Things other people want you to do
- Things that have always been done this way
- Things you’re not unusually good at doing
- Things you don’t enjoy doing
- Things that are always interrupted
- Things few other people are interested in
- Things that have already taken twice as long as you originally expected
- Things where your collaborators are unreliable or low quality
- Things that have a predictable cycle
- Answering the telephone
THE TOP 10 HIGHEST-VALUE USES OF TIME
A second list gives the other side of the coin.
The Top 10 highest-value uses of time
- Things that advance your overall purpose in life
- Things you have always wanted to do
- Things already in the 20/80 relationship of time to results
- Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results
- Things other people tell you can’t be done
- Things other people have done successfully in a different arena
- Things that use your own creativity
- Things that you can get other people to do for you with relatively little effort on your part
- Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
- Things for which it is now or never
CHAPTER 11: YOU CAN ALWAYS GET WHAT YOU WANT
CHAPTER 12: WITH A LITTLE HELP FROM OUR FRIENDS
PROFESSIONAL RELATIONSHIPS AND ALLIANCES
We now turn to your relationships and alliances related to your work. Here the importance of a few close allies can hardly be overstated.
Individuals may appear to do amazing things—and they do. But exceptional individual performance requires allies.
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.
You badly need allies. You must treat them well, as an extension of yourself, as you treat yourself (or should). Do not assume your friends and allies are all of roughly equal importance. Focus your attention on nurturing the key alliances of your life. If this seems obvious or banal, ask yourself how many of your friends follow these lines. Then ask yourself whether you do.
All spiritual leaders had many allies. If they needed them, so do you. To take one example: Jesus Christ depended on John the Baptist to draw him to public attention; then on the 12 disciples; then other apostles, notably St. Paul, arguably the greatest marketing genius in history.
YOU NEED A FEW KEY ALLIES
If you have had any success in life, you will (unless you are a blind egotist headed for a fall) recognize the crucial importance of allies in your achievements. But you will also detect the hand of the 80/20 Principle here. The key allies are few in number.
It is generally a safe assertion that at least 80 percent of the value of your allies comes from fewer than 20 percent of their number.
You don’t need many allies but you need the right ones,
Shared experience
Just as in the primitive village, we have a limited number of slots for important professional experiences. Shared experience, especially if it involves struggle or suffering, is very bonding.
Reciprocity
For alliances to work, each ally must do a great deal for the other party—repeatedly, consistently, over a long period of time.
Relationships where you are the mentor
Do not neglect these. You are likely to get the most out of your one or two mentees if they work for you, preferably for quite a long period of time.
CHAPTER 13: INTELLIGENT AND LAZY
The key to becoming a star is to stimulate, manufacture, and deploy lazy intelligence.
Von Manstein Matrix.
WHAT DOES ALL THIS MEAN FOR THE AMBITIOUS?
10 golden rules for career success
- Specialize in a very small niche; develop a core skill
- Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
- Realize that knowledge is power
- Identify your market and your core customers and serve them best
- Identify where 20 percent of effort gives 80 percent of returns
- Learn from the best
- Become self-employed early in your career
- Employ as many net value creators as possible
- Use outside contractors for everything but your core skill
- Exploit capital leverage
Specialize in an area in which you are already interested and which you enjoy. You will not become an acknowledged leader in anything that cannot command your enthusiasm and passion.
The key to making a career out of an enthusiasm is knowledge. Know more about an area than anybody else does. Then work out a way to marketize it, to create a market and a set of loyal customers.
CHAPTER 15: THE SEVEN HABITS OF HAPPINESS
TWO WAYS TO BE HAPPIER
- Identify the times when you are happiest and expand them as much as possible.
- Identify the times when you are at least happy and reduce them as much as possible.
CHAPTER 16: YOUR HIDDEN FRIEND
PART FOUR: THE 80/20 FUTURE
CHAPTER 17: SUCCESS THROUGH 80/20 NETWORKS
More networks, more 80/20 phenomena.
CHAPTER 19: YOUR PLACE IN THE 80/20 PRINCIPLE
HINT 1: ONLY WORK IN NETWORKS
HINT 2: SMALL SIZE, VERY HIGH GROWTH
Joining company with fewer than a hundred employees increasing revenues by at least 30 percent a year–ideally fewer than twenty employees and at least doubling each year.
HINT 3: ONLY WORK FOR AN 80/20 BOSS
What is an 80/20 boss? Someone who consciously or unconsciously follows the principle. By their works you shall know them:
- They focus on very few things—the ones that make a BIG difference to their customers, and, if they still have them, their bosses (hopefully a temporary arrangement—the best 80/20 bosses are not themselves constrained by a boss).
- They are going places fast.
- They are rarely short of time, and never flustered. They are usually relaxed and happy, not workaholics.
- They look to their people for a few valuable outputs. They pay no attention to inputs such as time and sweat.
- They take the time to explain to you what they are doing, and why.
- They encourage you to focus on what delivers the greatest result with the least effort.
- They praise you and you deliver great results, but are constructively critical when you don’t—and suggest that you either stop doing something unimportant or do something important in a more effective way.
- When they trust you, they leave you alone and encourage you to come to them when you need guidance.