What is the art of focus?- Why the 80% / 20% rule matters?

This is a post for businesses to focus on what matters. This post highlights why discussing and making decisions based on averages could ruin your business.

This is an excellent guide for small business owners and SME investors and owners to consider the Pareto Principle in all their daily business undertakings.

Focusing on the details is important but is it wise to focus on the details that matters.

I am sure that most of you have heard and know about the Pareto principle or sometimes referred to as the Pareto efficiency. However, I have observed that day in and day out not many people actually give it thought, much less actually apply this “universal” cardinal principles in everyday life and business.

So who is this Pareto?

So what is the Pareto Principle and why is it so important? Let me first define what the Pareto principle is, and who Mr. Pareto was.

The Pareto principle (also known as the 80-20 rule,[1] the law of the vital few, and the principle of factor sparsity) states that, for 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; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas. (Source: http://en.wikipedia.org/wiki/Pareto_principle)

The fallacy of averages

If you are like me, most of you have heard in everyday business, stuff like the average sales per day is so much, the average revenue per customer is this, the average score is that or the average age is this and so on.

Others often talk about the average returns of the stock market or the average height of the terrain is x and y.

Just take a moment and think about this. These averages mean nothing. They are fallacies in real life and I cannot fathom why it is so common in business.

Imagine a plane flying from a to b and the average terrain is 3000 feet,  calculated from a low of 0 feet above sea level and a mountain peak of 6000 feet.   You can just imagine if the pilot decides to plot his flight plan based on an average of 3000 feet.  Or, imagine a person with no swimming skills trying to cross a lake just because some one said that the average depth is 3 feet. J

Therefore, discussing averages have no meaning if the average revenue derived from a few customers is exponentially bigger than the rest.

In my industry (telecommunications), I often hear folks speaking about the average revenue per customer, the average minutes of use, the average orders per channel or the average customer care service levels.

These averages are useless and baseless. They tell me nothing. The average revenue might be a result of having a few large customers versus the rest of the base. Not focusing your attention on these few large customers can sometimes mean the end of some businesses.

In most companies that I have worked for, 80% of the incremental sales (new sales) are generated through about 20% of the sales folks. Still most training investments are spread across the entire sales force. Just imagine the returns if a company can hone to the next 5th or 10th percentile. Imagine the savings and the focus and the tremendous results that can be achieved.

Imagine building capacity for a network, factory, hotel, restaurant and others based on averages. I have often been to restaurants that have excellent food but very poor service during peak times. I am pretty sure that the owners of the business have been misdirected to resource based on averages.

Trying saying to an employee that the average bonus payout is $X when he or she probably received one fifth of that $X.

The average is as close to the bottom as it is to the top

As the famous George Carlin said “just think of how stupid the average person is, and then realize half of them are even stupider!”

Alfred Sloan also once famously said that “If you do it right 51 percent of the time you will end up a hero”

As you would have noted by now, focusing on the averages really mean nothing.

Be laser focused using the “64-4” law.

If a result, problem, outcome or anything has 80% of effects coming from 20% of causes, it will follow that the 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on. (80% of 80% is 64%; 20% of 20% is 4%. So there is a “64/4″ law;

Often, just by knowing that 4% of customers, revenues, problems or issues could be much more worth your while than all the others.

What you would have noticed is that it does not always have to add up to 100 (80/20). It can be 64/4 or 70/40, like 70% of a company’s revenue comes from 40% of its customers. The key is to focus on what matters. Trying to solve all major issues at one time without focusing on a few critical ones often is costly, non attainable and almost always futile and a failure.

The “Pareto” as a way of life.

The application of the Pareto principles doesn’t just have to be restricted to business, but rather can be applied to everyday living.

Imagine if you are trying to save money or if something or some one annoys you or you feel “good” at times. Just focusing on the few issues or attributes or behaviors can help you address, alleviate or enhance the experience or relationship or whatever it is that you are trying to do.

Power law

The Pareto Principle is a “power law” relationship. A power law is a special kind of mathematical relationship between two quantities. When the frequency of an event varies as a power of some attribute of that event (e.g. its size), the frequency is said to follow a power law. The distribution of a wide variety of natural and man-made phenomena follow a power law, including frequencies of words in most languages, frequencies of family names, sizes of craters on the moon and of solar flares, the sizes of power outages, earthquakes, and wars, the popularity of books and music, and many other quantities.

Source : http://en.wikipedia.org/wiki/Power_law

Life is too short!

In conclusion, I salute and thank Mr. Pareto for this universal principle that can be applied in our everyday life. This might seem as something that is too obvious or easy, but remember that most folks ignore this principle day in and day out.

If you do not believe me just observe this at your work place tomorrow. The good folks from Finance, Sales, HR, Technology, Operations and Marketing will all be preaching to you about the average of this and that. Take note and decide if it makes sense. Force the discussions around stuff that matters. Stay focused, as life is too short.

John.lincoln@gmail.com Twitter @lincolnjc

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This entry was posted in Decision, Leadership, Pareto, Strategy, Uncertainty and tagged , , . Bookmark the permalink.

70 Responses to What is the art of focus?- Why the 80% / 20% rule matters?

  1. Michael Smith says:

    Hi John,

    Good thoughts, and also applies to the success in project delivery when it comes to expending time during planning phase and by that I mean pro-active planning.

    It’s advisable that business strategies, business cases for new products be borne by senior management and in an ideal world this would be the case if senior management had time to expend reading market indicators, filtering new product trends and sales data but in reality it’s an assigned marketer, product specialist or analyst who crunches the numbers and sells the business case to senior management who filter good ideas from not so good ideas and in the process projects / product launches are borne (It might be a good idea to assess and see how the 20 / 80 rule is split here in this example and where it should be split?)

    From a Project Management perspective it is said that if enough time is spent during the planning stage that between 60 to 70% of the project success is already garranteed, the remaining 30% is the skill that the project team brings to the table in terms of risk management, scope management, resource management etc etc. In the ideal world a project / product launch that takes 6 months should enjoy + – 1 month in planning. In reality real time expended on quality planning is much less and because of administrative lag and approvals takes longer than 1 month. In addition that 20% that was not expended in the planning phase causes re-works, scope creap, unforseen impacts and stretches out the 6 month delivery causing project teams to have to deliver while re-planning / adding in contingencies and work-a-rounds.

    I think the question I’m asking here is how is the Pareto Principle applied, is it the 20% of the proactive thinkers and do’ers that deliver 80% of the effort? If this is true then even these ratio’s are thwarted by other factors causing inefficiencies as described above

    Alignment is necessary …. from the top down …. together with other complimentary strategies

    These are my thoughts and maybe the questions posed could be used when assessing effectiveness of strategies during initialisation and planning

    thanks for the article

  2. JOhnny Malek says:

    Couldn’t agree more with you John on this one.
    As a company, the pareto principle is often said when that firm doesn’t know who the 20% are!
    If one is able to identify these 20%, one can communicate to them in the most compelling way, saging that firm, time, effort, and most of all money !

  3. Manoj Nair says:

    this is so true prof….however let me put an interesting spin to it

    I would say a capitalist looks at things the pareto way while a socialist looks at things the average way. Both ways have their plus points…..the capitalist knows how to maximise his value and his returns by focussing on the highest value customers while the socialist is tryin to ensure that everyone is benefitting from the economy, so for him the average (or the per capita as he is obsessed with) has to improve…..hence the need to observe both

    Let us also look at our industry telecom – pareto helps us improve our efficiencies and aligns cost to value…..however if u do not look at ARPU, you ignore Market share and once you do that it is a matter of time when you are crowded out of the market – you will be cannibalised by your competitor

    But havin said pareto is a must , especially in today’s life where looking at an average is so convenient and easy but pareto causes us to think that much more harder and optimise our results

  4. Sajid A R says:

    Its a accepted fact, the think tank, action team and sales team constitutes to 5 to 10 percent of the entire work force, the entire sales generated by this key group is backed by the rest of the team its a chain……….

  5. Pawan Pratap Singh says:

    In response to Manoj:

    Socialists might benefit from looking at thing the Pareto way as well. Rather than focusing on the top “customers” giving them 80% of the revenue, they could focus on the bottom end of the population causing 80% of the losses.

    In all, a great article John!

  6. Denisha Lincoln says:

    good job dad!! :)

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    Great insight. Works all the time

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    Very interesting article and very insightful content. Your style in presenting it hooks me to read more and wait for the following post to appear. Great job

  9. PK Gulati says:

    Hmmm. Succinctly put, John. Insight that would be valuable to everyone and in every part of whatever you do.

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