“There is nothing quite so useless, as doing with great efficiency, something that should not be done at all.” – Peter Drucker
The Pareto Principle – also known as the 80:20 rule – is applicable to any business and let time and time again I witness business owners failing to understand this and so wasting valuable time, energy and money on activities that are not adding to helping the business meet it’s goals. As my regular herd members know I am all about creating businesses that are more efficient and what I called Joined Up.
So what is the Pareto Principle? It holds that 80% of the consequences of any action come from 20% of the causes. This principle can actually be applied to everything you do. It is a powerful, fundamental principle of life – and of working smart.
The original 80:20 observation was as a result of Italian economist Pareto noticing in 1906 that 80% of Italy’s land was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. He and others later discovered that this principle is proven in many other areas of interest:
- 80% of results come from 20% of effort;
- 20% of your customers will account for 80% of your profit.
Apply the 80:20 rule to the information you receive: 20% is useful, whereas 80% is not. The key is to identify and focus on that 20% and ignore or remove the rest completely.
The same is true of time expended for results achieved. Think of the benefits of applying the Pareto Principle to your time management and personal and business productivity!
Which one of these statements rings true for your business?
- 80% of your business comes from 20% of your customers
- 20% of your product or service range contributes 80% of your profit
- 80% of customer complaints originate from 20% of the causes.
- 20% of your individual effort and time achieves 80% of the desired results
- 80% of your business productivity loss results from 20% of the causes
- 20% of your staff is responsible for 80% of the business outputs and results
- 80% of the value in the business is generated by 20% of the processes
The common approach to business is to squeeze every last drop out of each opportunity, to go ‘100% all-out’, without consideration of the impact on time, productivity and wastage. Simple, time-efficient businesses recognise that it is fundamentally inefficient to go for the ‘whole pie’ when you can get the majority of results for the minority of effort.
With knowledge of the 80:20 principle, you can concentrate on what wins you customers and success. Look at your business and concentrate on the 20% that produces the 80% of benefit. Spend 80% of your time doing the 20% that really gets you results. ‘You win some, you lose some’ is no way to run a successful business, but armed with knowledge of the Pareto Principle, you can work the system to your benefit.
It’s not just about working smarter – it’s about working smarter on the right things that will get you the best results. Think really boldly about this law – how far, and in how many ways you can apply it. The more incredible the results can be.
- Why spend 100% of your money and time on ‘growth at all costs’ when you could downsize, freeing up capital and time? Spend just 20% in developing the most profitable 80% of your current business, and invest the rest in other ventures?
- Why work full time, when you can work only 20% of the time on the things that get you 80% of your profits? And spend the rest of the time sipping a cold beer on the beach, watching the sun go down or if you are like me hanging out with my horses!
This year I am actively reviewing my business to see which activities I need to focus on most and which I can let slip by as the benefits of doing them are not worth the time and energy invested.
I encourage you to cast a critical eye over your business and examine what you need to do more of and what you need to stop doing. I’d love to hear what you discover about your business
How can you use this rule to revolutionise your business and your life? Take it to the limit!
Julia Felton (aka The Business Wrangler) is the founder of Business HorsePower. Business leaders, entrepreneurs and executives hire her to accelerate their business performance by harnessing the energy of their people to work more collaboratively together. By aligning purpose with actions the team achieves exponential results as everyone starts pulling in the same direction.
Julia believes that business is a force for good and through designing purpose-driven businesses that leverage the laws of nature, and the herd, you can create businesses founded on the principles of connection, collaboration and community that make a significant impact in the world.
