The 80/20 Principle

Ginger Rogers – the Academy award winning actress – had once famously quipped – “Stand for something or you will fall for anything.” Despite the fact that Ginger’s context was entirely different from Pareto’s, I could always relate the two. I was introduced to the concept of Pareto’s 80/20 Law in my B-School. I found the essence of the principle quite refreshing and inspiring. The 80/20 principle is a principle of selectivity and focus; in a way, indicating the benefits one can leverage from standing for something. In other words, our success in life is not a function of how many things we know. On the contrary, it’s a function of how well we know what we don’t know.

Many of us may already be cognizant of the fact that our incapabilities far outnumber the capabilities we have. Yet, we keep on trudging along, trying to work off our gray areas in order to achieve success. Needless to mention, the results are anything but encouraging. Richard Koch’s version of the 80/20 principle deals with the same issue, albeit, in many different contexts – ranging from personal achievements to business strategy to marketing and what you have. Let me sound you off at the outset that if you are a hardcore statistics aficionado or for that matter, someone who considers any improvisation on good old economic principles as preposterously insulting, then, you might feel let down a bit. At the same time, I would stick my neck out and proclaim that this book is a must read for management students, educators, corporate greenhorns (for whom the corporate learning curve seems mighty steep) and anyone who hasn’t read an ‘un-boring’ management book for a long time.

What I like the most about the book is the eloquent and cerebral manner in which it has been written. There are no loose ends, no mind-numbing phrases and no yawn-inducing chapters. All in all, despite the potpourri nature of the book, it’s a clear winner. It’s one of those books you would look forward to reading until the very end. Richard Koch brings in a  number of different domains in the purview of the 80/20 principle. You have Business strategy, Self-actualization, Investing, Project management, Decision-making, Time management, marketing, etc. For those who have missed out on Stephen Covey’s 7 habits, there is Koch’s seven habits of happiness.

Richard Koch – a London-based entrepreneur and a successful investor –  elaborates upon the concept put forth by Italian Economist Vilfred Pareto in his book – “The 80/20 principle: The secret of success by achieving more with less.” Despite the fact that this book draws upon the principle of an erstwhile economist, it comes across as more of a motivational book. However, unlike the heap of motivational books out there– a majority of which is low on substance and high on fluff – this one doesn’t preach. On the contrary, Koch capitalizes upon the work of Vilfred Pareto and improvises a theory which, in my opinion, has definite ‘practical’ manifestations in one’s professional as well as personal life. Of the many ramifications of Pareto’s Law, the one I find the most encompassing is – “a miniscule fringe of things in our life contributes to the majority of happiness and bliss that we enjoy.”

Pareto arrived at 80/20 principle while he was studying the disproportionate patterns of wealth and income in the 19th Century England. The imbalance between the wealthy and the income earners appeared again and again in Pareto’s study, thus, solidifying his concept of proof. The basic premise of the 80/20 principle is that universe abhors equilibrium.

Koch states that there is always an inherent imbalance between two sets of data that relate to causes and effects, inputs and outputs, efforts and rewards, and so forth. For instance, 80 percent of effort may yield only 20 per cent reward or 20 percent of effort may yield 80 per cent rewards. The significance of the 80/20 principle lies in detecting which Variable A (20%) results in Variable B (80%). Such seemingly inconsequent variables can have fantastic impact on our lives, according to Koch. They should be identified, improved upon and multiplied. The corollary is equally important here. Wasteful proportion, if in the majority, should be drastically reduced. In short, identify the ‘vital few’ and cut back on the ‘trivial many’.

Linear thinking has been coded into our DNA. And this is where the 80/20 principle is different. It goes against the common grain that 50 percent effort would lead to 50 percent rewards. All too often, we attribute our success to ostensible reasons e.g. Hard work, good networking, etc. Never once does it cross our minds that our success may in part be due to variables that we hardly take into consideration. Since these variables are difficult to detect, our brain rather steers clear of them and settles for gross oversimplification of an otherwise complex array of data. But then, that’s the way we, humans, have been programmed.

Koch reminds us that the piecemeal approach towards the 80/20 principle has left the idea underexploited, even by those who recognize its significance. This book is full of gems. I am listing down a few of them that appealed to me.

My Key Takeaways from ‘The 80/20 Principle’

  • Universe hates stability. There is always an inherent imbalance between two related sets of data. Identify the ‘vital few’ and cut down upon the ‘trivial many’. Be strong somewhere than being mediocre everywhere.
  • Things are not always lined up straight. There will always be subterranean forces at work. Always take non-linearity and its importance in your life into consideration.
  • A product has to be only 10 percent better than of the competitor’s product to generate a sales difference of more than 50 percent and a bottom-line difference of, perhaps, 80 percent.
  • Outsourcing is a terrific way to cut costs. Retain your core competencies and outsource everything else.
  • Why do supposedly profit-generating firms turn into epitomes of complexities, despite being cognizant of the value-destroying implications of such moves? Koch’s answer is curt yet emphatic. Managers embrace complexity because it’s stimulating and intellectually challenging, thus, creating interesting jobs for managers.
  • Koch says, “Important as focus on the few best products is, it is much less important than focusing on the few best customers.” (Remember: 80 percent of the revenues come from 20 percent of the customers). Being customer centered on all your customers is pretty much impossible; however, catering to the top 20 percent is as feasible as it is rewarding.
  • 80 percent of negotiations occur in the last 20 percent times. In the similar vein, most of what we achieve in our lives occurs in a very small proportion of our lives.
  • Most people spend most of their time on activities that are of low value to themselves and others, for example, watching TV and playing video games. The 80/20 thinker escapes this trap by making efficient use of only 20 percent of time involving ‘high-value’ activities.
  • We live in an increasingly marketized world. The top names command enormous fees – but those who are not quite as good make relatively little. The key to earning more and working less is to do things that you are enthusiastic about.
  • Carve a niche for yourself in some field. Be a specialist. You don’t have to commission a research to figure out the kind of privileges specialists enjoy. Who commands more respect – a general physician or an ENT specialist?
  • You have to know more about something than anybody else. Do not stop improving until you have expertise in that niche. Reinforce your lead by constant practice and inveterate curiosity.
  • If you feel that you are always behind, if you are struggling to keep up with the work’s requirements: then in all probabilities either you are in the wrong job or doing it completely the wrong way!
  • What is the 20 percent of your time when you achieve 80 percent of your results? Do more of it! What is the 80 percent of your time when you achieve little?1 Do less of it! Identify the times when you are happiest and expand them as much as possible. Depression is a self-created and self-reinforced phenomenon. Cut out events that you know stir trouble in your life.