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

by Richard Koch

Second is Nicholas Brealey, who has put so much intelligent effort into this book that I sincerely hope it pays off for him! According to the Von Manstein principle (see Chapter 13), people like Nicholas who are smart and industrious will not be as successful as those who are smart and lazy. To become a real star, Nicholas must work a great deal less. I have a theory that if he published half the number of books, and put all his effort into these, he’d make even more money. I hope my next book will not be one to get the axe! I am very grateful for his persistence on this book.

What J-B Say called the work of entrepreneurs, modern financiers call arbitrage.

the 80/20 Principle involves a static breakdown of causes at any one time.

Equality ends in dominance: that is one of the messages of chaos theory. The 80/20 Principle’s message is different yet complementary. It tells us that, at any one point, a majority of any phenomenon will be explained or caused by a minority of the actors participating in the phenomenon. Eighty percent of the results come from 20 percent of the causes. A few things are important; most are not.

never to go to lectures. “Books can be read far faster,” he explained. “But never read a book from cover to cover, except for pleasure. When you are working, find out what the book is saying much faster than you would by reading it through. Read the conclusion, then the introduction, then the conclusion again, then dip lightly into any interesting bits.” What he was really saying was that 80 percent of the value of a book can be found in 20 percent or fewer of its pages and absorbed in 20 percent of the time most people would take to read it through.

The examiners could therefore be much better impressed by a student who knew an awful lot about relatively little, rather than a fair amount about a great deal. This insight enabled me to study very efficiently.

It was better to be in the right place than to be smart and work hard. It was best to be cunning and focus on results rather than inputs. Acting on a few key insights produced the goods. Being intelligent and hard working did not. Sadly, for many years, guilt and conformity to peer-group pressure kept me from fully acting on this lesson; I worked far too hard.

The most valuable insight from 80/20 Analysis will always come from examining nonlinear relationships that others are neglecting.

80/20 Thinking is my phrase for the application of the 80/20 Principle to daily life, for nonquantitative applications of the principle. As with 80/20 Analysis, we start with a hypothesis about a possible imbalance between inputs and outputs, but, instead of collecting data and analyzing them, we estimate them. 80/20 Thinking requires, and with practice enables, us to spot the few really important things that are happening and ignore the mass of unimportant things. It teaches us to see the wood for the trees.

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.

Even management scientists are belatedly realizing the value of simplicity. A recent careful study of 39 middle-sized German companies, led by Gunter Rommel,2 found that only one characteristic differentiated the winners from the less successful firms: simplicity. The winners sold a narrower range of products to fewer customers and also had fewer suppliers. The study concludes that a simple organization was best at selling complicated products.

Second, you need to provide quite 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 asked you for anything else.”10 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.

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 it 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.

Finally, 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. Venture capitalists know this. Most of the investments in their portfolio fail to meet their expectations, but they are redeemed by a few superstar investments that succeed beyond everyone’s wildest dreams. When a business keeps performing below its budgets, you may be sure you have a dog. When a business consistently outperforms expectations, there is at least a good chance that it can be multiplied by ten or a hundred times. In these circumstances, most people settle for modest growth. Those who seize the day become seriously rich.

80/20 Thinking is different from the type of thinking which prevails today. The latter is usually rushed, opportunistic, linear (for example, x is good or bad, what caused it?), and incrementalist. The predominant type of thinking in today’s world is very closely allied to immediate action and consequently is greatly impoverished. Action drives out thought. Our objective, as 80/20 thinkers, is to leave action behind, do some quiet thinking, mine a few small pieces of precious insight, and then act: selectively, on a few objectives and a narrow front, decisively and impressively, to produce terrific results with as little energy and as few resources as possible.

much more attractive, and at least equally attainable, combination is that of extreme ambition with confidence, relaxation, and a civilized manner.

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.

An extreme case of carelessness with allies is picking the wrong “significant other” or life partner.

Most people have too many friends and do not enjoy an appropriately selected and reinforced inner circle. Many people have the wrong life partners—and even more do not nurture the right life partner properly.

money. Money not spent can be saved and invested and, through the magic of compound interest, multiplied. But happiness not spent today does not lead to happiness tomorrow. Happiness, like the mind, will atrophy if not exercised. 80/20 thinkers know what generates their happiness and pursue it consciously, cheerfully, and intelligently, using happiness today to build and multiply happiness tomorrow.

I arrive at this conclusion from the 80/20 Principle’s argument about arbitrage. Eighty percent of the value in any organization or profession comes from 20 percent of the professionals. The workers who are above average will tend to be paid more than those who are below average, but nowhere near enough to reflect the differential in performance. It follows that the best people are always underpaid and the worst people always overpaid. As an above-average employee, you cannot escape from this trap. Your boss may think you are good, but will never credit your true value relative to others. The only way out is to set up in business yourself and, if you are so inclined, to employ other above-average workers. Don’t take either of these steps, however, if you aren’t comfortable with being self-employed or a boss.

This advice is what to do about other people. But what about yourself? It might be thought that intelligence and propensity to work are fixed properties, in which case the Von Manstein matrix, although interesting, is useless. But the position advanced in this chapter is slightly different. Even if you are hard working, you can learn to become lazy. And even if you or other people think you are stupid, you are intelligent at something. The key to becoming a star is to simulate, manufacture, and deploy lazy intelligence. As we will see, lazy intelligence can be worked at. The key to earning more and working less is to pick the right thing to do and to do only those things that add the highest value.

The second condition for superstar returns is that mediocrity must not be a substitute for talent.

Nowadays we have less respect for rank and more for markets.

Constraints that seem odd to our eyes—such as class or the absence of telecommunications—stopped Shakespeare and Leonardo da Vinci becoming millionaires. But lack of wealth did not diminish their achievements or the fact that a huge proportion of impact came from a tiny proportion of creators.

1 Specialize in a very small niche; develop a core skill 2 Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader 3 Realize that knowledge is power 4 Identify your market and your core customers and serve them best 5 Identify where 20 percent of effort gives 80 percent of returns 6 Learn from the best 7 Become self-employed early in your career 8 Employ as many net value creators as possible 9 Use outside contractors for everything but your core skill 10 Exploit capital leverage

For the individual, too, it is better to know a few things well, or preferably one thing exceptionally well, than it is to know many things superficially.

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

Anyone who has any recent experience of intellectual disciplines knows that knowledge is undergoing a profound and progressive fragmentation. In some ways this is worrying, since there is almost nobody in the intelligentsia or society as a whole who can integrate different advances in knowledge and tell us what it all means. But in other ways, the fragmentation is further evidence of the need for and value of specialization.

If you are not enthusiastic about your current career, and are ambitious, you should stop doing it. But before you take this step, work out a better career. Write down all the things about which you are enthusiastic. Then work out which of these could be made into a career niche. Then choose the one about which you are most enthusiastic.

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.

It is not enough to know a lot about a little. You have to know more than anybody else, at least about something. Do not stop improving your expertise until you are sure you know more, and are better in your niche, than anybody else. Then reinforce your lead by constant practice and inveterate curiosity. Do not expect to become a leader unless you really are more knowledgeable than anyone else.

Your market is those people who might pay for your knowledge. The core customers are those who would value your services most.

This requires you to define how the knowledge you have can be sold.

The one circumstance in which it may not be appropriate to become self-employed yet is when you are still in the rapid learning stage. If a corporation or professional firm is teaching you a great deal, the value of this learning may exceed the differential between the value you add and what you are paid. This is typically the case during the first two or three years of a professional career. It can also be the case when more experienced professionals join a new firm that has higher standards than the ones in which they have previously worked. In this case, the period of superlearning usually lasts for a few months only, or a year at the most.

Clearly, it is crucial to hire only net value creators: those whose value comfortably exceeds their cost. But it would be wrong to say you should only hire the best. The most excess value is created by employing as many excess value creators as possible, even if some of them are only twice as good as the average whereas others may be five times (or even more) as effective. Within your own workforce, there is still likely to be an 80/20 or 70/30 distribution of effectiveness. The greatest absolute surplus value may coexist with a fairly skewed distribution of talent. The only requirement is that your least supereffective employee still adds more value than he or she costs.

Identify personal levers that can magnify positive thoughts and cut off negative ones. In what circumstances are you at your most positive and most negative? Where are you? Who are you with? What are you doing? What is the weather like? Everyone has a wide range of emotional intelligence, depending on the circumstances. You can start to build up your emotional intelligence by giving yourself a break, by skewing the odds in your favor, by doing the things where you feel most in control and most benevolent. You can also avoid or minimize the circumstances where you are at your most emotionally stupid!

If you have not yet selected a partner, remember that your happiness will be greatly influenced by the happiness of your partner. For the sake of your happiness, as well as for love, you will want to make your partner happy. But this is a great deal easier if your partner has, to start with, a happy temperament and/or if he or she consciously adopts a prohappiness daily regime (such as my happiness habits). Team up with an unhappy partner and the odds are that you yourself will end up unhappy. People with low self-esteem and self-confidence are a nightmare to live with, however much mutual love abounds. If you are a very happy person, you might just make an unhappy person happy, but it is a hell of a trick to pull off. Two mildly unhappy people who are deeply in love might just, with strong determination to be happy and a good happiness regimen, manage to attain mutual happiness; but I would not bet on it. Two unhappy people, even in love, will drive each other nuts. If you want to be happy, choose to love a happy partner.