The 80/20 Principle: The Secret of Achieving More With Less (18 page)

Many salesforce performance differentials do derive from pure selling skill, but many do not. These structural factors can also be looked at in 80/20 terms.

Selling is not just having good sales techniques

80/20 Analysis can identify structural reasons that reach far beyond individual competence. These structural factors are often much easier to address, and even more rewarding, than dealing with individual merit. A great deal often depends on the products being sold and the customers being served:

Look at the salesforce. We find, for example, that 20 percent of our salespeople are generating 73 percent of our sales; we find that 16 percent of our products are accounting for 80 percent of sales; also, 22 percent of our customers are producing 77 percent of our sales…

Looking further at our salesforce, we find that Black has 100 active accounts. 20 of these produce about 80 percent of Black’s sales. Green covers 100 counties, and we find that 80 percent of her customers are concentrated in only 24 counties. White sells 30 different products. Six account for 81 percent of her sales.
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We have already highlighted the 80/20 Principle’s application to products and customers in the section on marketing. Those in charge of salesforces should therefore:

• Focus every salesperson’s efforts on the 20 percent of products that generate 80 percent of sales. Make sure that the most profitable products attract four times the credit that an equivalent dollar of less profitable products does. The salesforce should be rewarded for selling the most profitable products, not the least profitable.

• Focus salespeople on the 20 percent of customers who generate 80 percent of sales and 80 percent of profits. Teach the salesforce to rank their customers by sales and profits. Insist that they spend 80 percent of their time on the best 20 percent of customers, even if they have to neglect some of the less important customers.

Spending more time with the minority of high-volume customers should result in higher sales to them. If opportunities to sell more existing products have been exhausted, the salesforce should concentrate on providing superior service, so that existing business will be protected, and on identifying new products that the core customers want.

• Organize the highest volume and profit accounts under one salesperson or team, regardless of geography. Have more national accounts and fewer regional ones.

National accounts used to be confined to firms where one buyer had responsibility for purchasing all of one product, regardless of the location to which it went. Here it is plainly sensible to have an important buyer marked by a senior national sales executive. But increasingly, large accounts should be treated as national accounts and served by a dedicated person or team, even where there are many local buying points. Rich Chiarello, senior vice president of U.S. sales at Computer Associates International, comments:

Out of the top 20 percent of organizations, I’m going to get 80 percent of my revenue. I’m going to treat those companies as national accounts. I don’t care if a rep flies all over the country, he’s going to own the account, and we’re going to identify everyone in that organization and put a plan in place to sell them our products.

• Lower costs and use the telephone for less important accounts. A frequent complaint of salesforces is that downsizing or spending more time on large accounts can result in some sales territories having twice as many accounts as can reasonably be covered. One solution is to drop some accounts, but this should only be done as a last resort. A better solution, very often, is to centralize the 80 percent of smaller accounts and provide a telephone selling and ordering service. This can provide a more efficient service much more cheaply than is possible by face-to-face selling.

• Finally, get the salesforce to revisit old customers who have provided good business in the past. This can mean knocking on old doors or calling old phone numbers.

This is an amazingly successful sales technique, amazingly neglected. An old, satisfied customer is very likely to buy from you again. Bill Bain, the founder of strategic consultants Bain & Company, used to sell Bibles door to door in the Deep South. He tells of a lean spell, trudging from door to door and making no new sales, before he had a blinding glimpse of the obvious. He went back to the last customer who had bought a Bible and sold her another one! Another man following the same technique is one of the top real estate brokers in the United States, Nicholas Barsan, a Romanian emigrant. He wins over $1 million of personal commissions each year and over a third of these come from repeat customers. Mr. Barsan literally knocks on old doors and asks the homeowners (who were clients of his) if they’re ready to sell.

Making use of these 80/20 structural influences can turn mediocre salespeople into good ones and good ones into superstars. The impact of a better salesforce on a firm’s bottom line is immediate. Even more important is the longer-term impact on market share and customer delight of a salesforce pulsating with energy and confidence, determined to deliver the best to the core customer group, but still able to listen to what they really want.

THE VITAL FEW CUSTOMERS

Some customers are vital. Most are not. Some sales efforts are wonderfully productive. Most are inefficient. Some will lose you money.

Channel marketing and sales effort where you can offer a minority of potential customers something that is unique, better, or much better value than they can obtain elsewhere, provided that you can make higher profits in the process. Any successful enterprise draws its success from this simple, and simplifying, principle.

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THE TOP 10 BUSINESS USES OF THE 80/20 PRINCIPLE

The versatility of the 80/20 Principle is legion: it can be used in almost any area of function to direct strategic and financial improvement. Therefore, my Top 10 applications of the 80/20 Principle, shown in Figure 34, inevitably represent an arbitrary choice. In compiling the list, I took into account the extent to which, historically, the business world has already used the 80/20 Principle and also my own opinion of its potential and underexploited value.

Previous chapters have already covered my top six uses: strategy in Chapters 4 and 5; quality and information technology in Chapter 3; cost reduction and service improvement in Chapter 5; and marketing and sales in Chapter 6. The current chapter provides a summary of the other four applications of the 80/20 Principle in my hit parade.

Figure 34 The Top 10 business applications of the 80/20 Principle

DECISION MAKING AND ANALYSIS

Business requires decisions: frequent, fast, and often without much idea whether they are right or wrong. Since 1950, business has increasingly been blessed, or if you prefer plagued, by management scientists and analytical managers incubated in business schools, accounting firms and consultancies, who can bring analysis (usually linked to extensive and expensive data gathering) to bear on any issue. Analysis has probably been the greatest U.S. growth industry of all in the past half-century, and analysis has been instrumental in some of the greatest U.S. triumphs, such as the moon landing and the incredible accuracy of bombing in the Gulf War.

Anglo-Saxon big business has taken analysis too far

But analysis has had its darker side: the escalation of corporate staffs that are only now being properly dismantled; the infatuation with the latest fads peddled by highly numerate consultants; the stock market’s obsession with ever more sophisticated analysis of near-term earnings, despite the fact that these capture only a small part of what a company is really worth; and the withdrawal of intuitive confidence from the forefront of so much of business. The latter has led not just to the pervasive reality behind the cliché of “analysis paralysis,” but also to a change for the worse in those who head the West’s great corporations. Analysis has driven out vision, just as analysts have driven out visionaries from the CEO’s suite.

In short, you can have too much of a good thing and there is no doubt that the United States and Great Britain exhibit a strange misallocation of analysis: the private sector has far too much and the public sector far too little. Our large corporations need much less, but much more useful, analysis.

The 80/20 Principle is analytical but puts analysis in its place

Remember the main tenets of the 80/20 Principle:

• The doctrine of the vital few and the trivial many: there are only a few things that ever produce important results.

• Most efforts do not realize their intended results.

• What you see is generally not what you get: there are subterranean forces at work.

• It is usually too complicated and too wearisome to work out what is happening and it is also unnecessary: all you need to know is whether something is working or not and change the mix until it is; then keep the mix constant until it stops working.

• Most good events happen because of a small minority of highly productive forces; most bad things happen because of a small minority of highly destructive forces.

• Most activity, en masse and individually, is a waste of time. It will not contribute materially to desired results.

Five rules for decision making with the 80/20 Principle

Rule one says that
not many decisions are very important.
Before deciding anything, picture yourself with two trays in front of you—like the dreaded In and Out trays on a desk—one marked Important Decisions and one Unimportant Decisions. Mentally sort the decisions, remembering that only one in twenty is likely to fall into the Important Decision box. Do not agonize over the unimportant decisions and above all don’t conduct expensive and time-consuming analysis. If possible, delegate them all. If you can’t, decide which decision has a probability of 51 percent of being correct. If you can’t decide that quickly, toss a coin.

Rule two affirms that
the most important decisions are often those made only by default,
because turning points have come and gone without being recognized. For example, your chief money makers leave because you have not been close enough to them to notice their disaffection or correct it. Or your competitors develop a new product (as competitors to IBM did with the PC) that you think is wrongly conceived and will never catch on. Or you lose a leading marketshare position without realizing it, because the channels of distribution change. Or you invent a great new product and enjoy a modest success with it, but someone else comes along and makes billions out of a lookalike rolled out like crazy. Or the nerd working for you in R&D ups and founds Microsoft.

When this happens, no amount of data gathering and analysis will help you realize the problem or opportunity. What you need are intuition and insight: to ask the right questions rather than getting the right answers to the wrong questions. The only way to stand a reasonable chance of noticing critical turning points is to stand above all your data and analysis for one day a month and ask questions like:

• What uncharted problems and opportunities, that could potentially have tremendous consequences, are mounting up without my noticing?

• What is working well when it shouldn’t or at least was not intended to? What are we unintentionally providing to customers that for some reason they seem to appreciate greatly?

• Is there something going badly astray, where we think we know why but where we might be totally wrong?

• Since something important is always happening underneath the surface, without anyone noticing it, what could it be this time?

The third rule of 80/20 decision making is for important decisions:
gather 80 percent of the data and perform 80 percent of the relevant analyses in the first 20 percent of the time available, then make a decision 100 percent of the time and act decisively as if you were 100 percent confident that the decision is right.
If it helps you to remember, call this the 80/20/100/100 rule of decision making.

Fourth,
if what you have decided isn’t working, change your mind early rather than late.
The market in its broadest sense—what works in practice—is a much more reliable indicator than tons of analysis. So don’t be afraid to experiment and don’t persevere with losing solutions. Do not fight the market.