The 80/20 Principle: The Secret to Achieving More with Less

by Richard Koch

The 50/5 Principle

The 50/5 Principle asserts that, typically, 50 percent of a company’s customers, products, components, and suppliers will add less than 5 percent to revenues and profits. Getting rid of the low-volume (and negative value) 50 percent of items is the key to reducing complexity.

The solution was to cut the number of products by more than half. Instead of dealing with 1,000 suppliers, purchases were consolidated through the 200 suppliers who comprised 95 percent of total supplies (a 95/20 Principle). The organization was streamlined and flattened.

A simpler, smaller operation rapidly restored profits. Less was more.

waste thrives on complexity; effectiveness requires simplicity

major improvements are always possible, by doing things differently and by doing less.

REDUCING COSTS USING THE 80/20 PRINCIPLE

All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance.

SIMPLICITY POWER

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 larg...

HOOKING THE RIGHT CUSTOMERS

Serving the core 20 percent of customers must be a company-wide obsession

Most studies find that the top 20 percent of salespeople generate between 70 and 80 percent of sales.

hang on to the high performers.

hire more of the same type of salesperson.

try to identify when the top salespeople sell the most and what they did differently then.

get everyone to adopt the methods that have the highest ratio of output to input.

switch a successful team from one area with an unsuccessful team from another area. Do this as a genuine experiment: you will soon find out whether the good team can beat the structural difficulties or vice versa.

Invest the most training in those who perform best after the first series of training. Take the best 20 percent of the trainees and invest 80 percent of the training effort in them. Stop training the bottom 50 percent, unless it is clear that you are obtaining a good payback even on this effort.

Focus every salesperson’s efforts on the 20 percent of products that generate 80 percent of sales.

Focus salespeople on the 20 percent of customers who generate 80 percent of sales and 80 percent of profits.

Organize the highest volume and profit accounts under one salesperson or team, regardless of geography. Have more national accounts and fewer regional ones.

THE TOP 10 BUSINESS USES OF THE 80/20 PRINCIPLE

1 Strategy 2 Quality 3 Cost reduction and service improvement 4 Marketing 5 Selling 6 Information technology 7 Decision making and analysis 8 Inventory management 9 Project management 10 Negotiation

The third rule of 80/20 decision making is for important decisions: gather 80 percent of the data and perform 80 percent of the relevant analyses in the first 20 percent of the time available, then make a decision 100 percent of the time and act decisively as if you were 100 percent confident that the decision is right. If it helps you to remember, call this the 80/20/100/100 rule of decision making.

when something is working well, double and redouble your bets. You may not know why it’s working so well, but push as hard as you can while the forces of the universe are bending your way.

Stock is measured in stock-keeping units (SKUs), with one unit for each variant.

Try to export the problem and cost of inventory management to other parts of the value-added chain—to your suppliers or to your customers. The ideal solution is for your stock never to come near your facilities. With modern information technology this is increasingly possible and can raise service standards while simultaneously cutting costs.

PROJECT MANAGEMENT

Simplify the objective

Eighty percent of the value of any project will come from 20 percent of its activities, and the other 80 percent will arise because of needless complexity. Therefore do not start your project until you have stripped it down to one simple aim. Jettison the baggage.

Impose an impossible time scale

This will ensure that the project team does only the reall...

Plan before you act

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 ...

Decide who is to do what...

Replan after short intervals, based on your new knowledge and any divergences fro...

Design before you implement

NEGOTIATION

Few points in a negotiation really matter

Don’t peak too early

Impatient people don’t make good negotiators.

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.8

THE VITAL FEW GIVE SUCCESS TO YOU

Accounting systems are the enemy of fair rewards, because they are absolutely brilliant at obscuring where the money is really being made. This is why, human frailty apart, the imbalance between performance and reward is greater in large and complex firms than in small businesses.

We are continually surprised at how well the best activities are doing and at how long it is taking for the problem areas to turn around. Usually, the latter never do. We nearly always take too long to realize this and only the intervention of a new boss, a crisis, or a management consultant makes us do what we should have done long ago.

Fortunes are made by the very few who latch on to growth when it is still small and accelerating.