The 80-20 Rule

At the age of 26 the board of directors of the company who employed me put me and another guy in charge of opening a branch office for the company. Going into that market we had a few select clients; not enough to make us profitable, but enough to give us a good head start in the market. We went out madly chasing new clients, looking for new work. At that point, we would take on almost any job, regardless of size, personal interest or potential for repeat work. We simply wanted to be in the market.

Six months after establishing the office, one of the company Directors met with us. We talked a lot about new markets and finding new clients and the one point he made that stuck out in my mind was that 80% of our revenue came from 20% of our clients. Whilst we were new to the market he agreed that we should take on any and all customers, however, once we were established we should decided which clients are generating the 80% and which are generating 20%. He advised that at busy times, we need to focus on the good 20% and let a portion, if not all of the bad 80% clients go. What he established for us, was the 80-20 rule.

At the time I wasn’t familiar with the 80-20 rule, but now it rings true in almost all aspects of my business dealings.

For those unfamiliar with the 80-20 rule, or those who enjoy being reminded, the 80-20 rule, also known as the Pareto principle, is the law of the vital few, and the principle of factor sparsity. The law states that in many events, roughly 80% of the effects come from 20% of the causes. Business management thinker Joseph M Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. Over the years, the principal has been spoken of as the 90-10 rule and in some cases the 95-5 rule. Regardless of the break-up, Joseph M Juran made a very strong point, and one that can be seen in almost all circumstances, particularly in business.

Today I am reminded of the principal as I scan through my to-do list and notice some items that have a large potential to increase revenue are left undone, yet a lot of the little items (like organize board room for AGM, prepare minutes from last Thursdays meeting) have all been crossed off. I have been focusing on the 80% tasks that produce 20% of the results. I need to re-adjust and go back to focusing on the 20% tasks that produce 80% of the results.

Throughout life, consider yourself and your business as the 20%. Know that 20% of the good work you do will generate 80% of the results. Don’t be scared to neglect, put on the back-burner, or postpone some of the 80% work, especially when times are stressful.