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

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THE VITAL FEW GIVE SUCCESS TO YOU

The 80/20 Principle comprises radar and autopilot. The radar gives us insight: it helps us spot opportunities and dangers. The autopilot allows us to stroll around our business arena and talk to customers and anyone else who might matter, knowing that we are still in control of our destiny. The logic of the 80/20 Principle requires us to grasp and internalize a few simple points; we can then easily “think 80/20” and “act 80/20” whatever we are doing.

A few things are always much more important than most things

This is invariably true, yet difficult at first to credit. Unless we have numbers or 80/20 Thinking to guide us, most things always appear more important than the few things that are actually more important. Even if we accept the point in our minds, it is difficult to make the next hop to focused action. Keep the “vital few” in the forefront of your brain. And keep reviewing whether you are spending more time and effort on the vital few rather than the trivial many.

Progress means moving resources from low-value to high-value uses

Like individual entrepreneurs, the free markets shift resources out of areas of lower productivity into areas of higher productivity and yield. But neither markets nor entrepreneurs, let alone today’s overcomplex corporate or government bureaucracies, do this well enough. There is always a tail of waste, usually a very long tail, where 80 percent of resources are producing only 20 percent of value. This always creates arbitrage opportunities for genuine entrepreneurs. The scope for entrepreneurial arbitrage is always underestimated.

A few people add most of the value

The best people—meaning the people best fitted to what they are doing and doing the things that make the most money—generate enormous surpluses, usually far beyond what they are allowed to take out. Normally there are very few such people. The majority add little more than they take out. A large minority (still often the majority) take out more than they contribute. This misallocation of resources is greatest in larger and more diversified corporations.

Any large, managed corporation is an organized conspiracy to misallocate rewards. The larger and more complex the firm, the greater the extent and success of the conspiracy. Those who work in corporations, or have extensive dealings with them, know that a few employees are priceless. They add value far beyond their cost. Many employees are passengers adding much less value than they cost. Some, perhaps 10–20 percent, subtract value, even ignoring their compensation.

There are many reasons for this happening: the difficulty of measuring true performance; the political skill or otherwise of executives; the difficult-to-eradicate tendency to favor those whom we like; the ridiculous but prevalent idea that job role should count for as much or more than individual performance; and the sheer human tendency toward egalitarianism, often buttressed by the legitimate wish to foster team working. Waste and idleness gravitate to where complexity and democracy meet.

I recently advised the head of an investment bank on how to divide up his extremely large annual bonus pool. My client is an extremely rich self-made businessman whose delight and source of success lie in spotting and exploiting market imperfections. He believes passionately in the market. He also knows that two people out of the hundreds in the bonus pool made more than 50 percent of the money in his division last year; in his line of business it is easy to measure. But when I suggested giving more than half the total pool to these two, he was aghast. Later on, we came to the case of one executive who we both knew was subtracting more value than he added (but who was both likable and an extremely astute politician within the bank). Why not cut his bonus to zero, I suggested. Again, my friend hadn’t thought of that: “Gee, Richard, I’ve already cut it to a quarter of what it was last year and I daren’t go any further.” Yet in this case, the executive should have been paying the bank to work there. Happily, the nettle was grasped. The bonus was set at zero. The executive has now moved to a job where he’s adding some value.

Accounting systems are the enemy of fair rewards, because they are absolutely brilliant at obscuring where the money is really being made. This is why, human frailty apart, the imbalance between performance and reward is greater in large and complex firms than in small businesses. The entrepreneur with four employees knows who is making the organization money, and how much, without needing a divisional P&L. The CEO of a large corporation needs to rely on misleading accounting data and the filter provided by the head of human resources (dread phrase!); it is not surprising that in large firms the top performers get less than they should and the mass of mediocre managers end up with more than they deserve.

Margins vary wildly

Margins—between value and cost, between effort and reward—are always highly variable. High-margin activities constitute a small part of total activities but a majority of total margins. If we didn’t interfere with the natural allocation of resources, these imbalances would become even more marked. But we bury our heads in the sand (accounting systems conveniently provide endless beaches specifically for this purpose) and refuse to acknowledge the reality that the majority of what we and our firms do is worth much less than the minority of high-margin activities.

Resources are always misallocated

We give too many resources to low-margin activities and too few to high-margin activities. Yet despite our best endeavors, the high-margin activities continue to flourish and the subsidized activities fail to generate their own momentum. If resources are available, because of the slack created by the high-margin activities, the low-margin activities will consume more and more resources while continuing to contribute little, zero or negative surpluses for reinvestment.

We are continually surprised at how well the best activities are doing and at how long it is taking for the problem areas to turn around. Usually, the latter never do. We nearly always take too long to realize this and only the intervention of a new boss, a crisis, or a management consultant makes us do what we should have done long ago.

Success is underrated and underrecognized

Success is undervalued, undercelebrated, and underexploited. Often it is dismissed as a lucky streak. But luck, like accidents, doesn’t happen as often as we think. “Luck” is our word for success which we cannot fathom. Behind luck there is always a highly effective mechanism, generating surpluses regardless of our failure to notice it. Because we cannot believe our “luck,” we fail to multiply and benefit from value-creating virtuous circles.

Equilibrium is illusory

Nothing lasts forever and nothing is ever in equilibrium. Innovation is the only constant. Innovation is always resisted and often retarded, but rarely extinguished. Successful innovation is hugely more productive than the status quo; it has to be, to overcome it. Beyond a certain point, the momentum of effective innovation becomes irresistible. Personal, corporate, and national success resides not in invention, or even in creating the marketable innovation, but in spotting the point at which the innovation is about to become irresistible and then riding it for all it is worth.

Change is necessary for survival. Constructive change requires insight into what is most effective and a focus on that winning way.

The biggest wins all start small

Finally, something big always comes from something which is small to start with. Small causes, small products, small firms, small markets, small systems: all of these are often the start of something big. Yet they are rarely recognized as such. Our attention is usually on the mass of what already exists, not on the trend evident in small phenomena. We usually only notice something after it has already become big, when the growth is already decelerating. Fortunes are made by the very few who latch on to growth when it is still small and accelerating. Even those who are experiencing the growth rarely realize its significance or potential to make a fortune.

STOP THINKING 50/50

We need massive reeducation to stop thinking 50/50 and start thinking 80/20. Below are some hints.

• Think skewness. Expect 20 percent to equal 80 percent. Expect 80 percent to equal 20 percent.

• Expect the unexpected. Expect 20 percent to lead to 80 percent and 80 percent to result in 20 percent.

• Expect everything—your time, your organization, your market, and every person or business entity you come across—to have quality 20 percent: its essence, its power, its value, a small part with substantially all the goodness hidden away by the mass of mediocrity. Look for the powerful 20 percent.

• Look for the invisible 20 percent and the subterranean 20 percent. It’s there—find it. Unexpected successes are one giveaway. If a business activity succeeds beyond expectations, that is a 20 percent activity—and it will have much further to run.

• Expect tomorrow’s 20 percent to be different to today’s 20 percent. Where is the germ, the seed, of tomorrow’s 20 percent? Where are the 1 percents that will grow to 20 percents and be worth 80 percent? Where are the 3 percents that last year were 1 percents?

• Develop the facility for mentally blocking out the 80 percents—the easy answer, the obvious reality, the evident mass, the current incumbent, the conventional wisdom, the prevailing consensus. None of these is what it seems or worth its weight in the basest of base metals. These 80 percents are huge blots on the landscape, stopping you seeing the 20 percents beyond. Look round these ugly blots, look over them, look beneath them, look through them. However you do it, ignore them, pretend they don’t exist. Free up your vision for the elusive 20 percents.

Psychologists tell us, however, that thought and attitudes can be changed by appropriate action, as well as the other way round. The best way to start thinking 80/20 is to start acting 80/20, just as the best way to start acting 80/20 is to start thinking 80/20. You have to try them out in tandem. The bullets below contain hints on how to act 80/20.

• Whenever you spot a 20 percent activity, run to it, surround yourself with it, immerse yourself in it, patent it, make yourself its expert, worshipper, high priest, partner, creator, propagandist, and indispensable ally. Make the most of it. If the most appears to be more than you can imagine, multiply your imagination.

• Use whatever resources you have at your disposal—talent, money, friends, business allies, powers of persuasion, your credit, your organization, whatever you have or can purloin—to seize, magnify and exploit any 20 percent you come across.

• Use alliances with other people extensively, but only ally yourself to 20 percent people and to the 20 percent of them that are powerful allies. Then seek to ally your alliance to other 20 percenters and 20 percentages.

• Exploit 80/20 arbitrage. Whenever you can, move resources from 80 percent activities to 20 percent activities. The profit from this is enormous because it is highly leveraged arbitrage. You use what is not very valuable to make something that is enormously valuable, winning at both ends of the exchange.

There are two principal media of 80/20 arbitrage: people and money, or assets that are proxies for money or can be turned into money.

Move 20 percent people (including yourself) away from 80 percent activities toward 20 percent activities.

Move money from 80 percent activities to 20 percent activities. If possible and not too risky, use leverage (gearing) in the process. If you really are moving 80 percent to 20 percent activities, the risk is much lower than generally perceived. There are two forms of money leverage. One is borrowing. The other is using other people’s money (OPM) as equity rather than debt. OPM used for 80 percent activities is addictive, dangerous, and risky. It ends in tears. OPM used for 20 percent activities creates winners all round and, quite fairly, allows you to be the biggest winner.

• Innovate new 20 percent activities. Steal 20 percent ideas from elsewhere: other people, other products, other industries, other intellectual spheres, other countries. Apply them in your own 20 percent backyard.

• Ruthlessly prune 80 percent activities. Eighty percent time drives out 20 percent time. Eighty percent allies hog space that should go to 20 percent allies. Eighty percent assets deprive 20 percent activities of funds. Eighty percent business relationships displace 20 percent ones. Being in 80 percent organizations or places stops you spending time in 20 percent ones. Living in an 80 percent place prevents you moving to a 20 percent one. Mental energy expended on 80 percent activities takes away from 20 percent projects.

So there we have it. Think 80/20 and act 80/20. Those who ignore the 80/20 Principle are doomed to average returns. Those who use it must bear the burden of exceptional achievement.

ON TO PART THREE

The 80/20 Principle has proved its worth in business and in helping business to startling success in the West and in Asia. Even those who do not love business, or know of the 80/20 Principle, have been touched by the progress made by the minority who do.