80% of what you’re doing is a waste of time, money and effort.

Let me say that again. 80% of the prospects you’re trying to sell to are a waste of time. 80% of your daily activities at the office are wasted. 80% of the emails you read and send aren’t necessary.

It’s an idea made famous by a long dead Italian economist, Vilfredo Pareto, that says that 80% of the outputs come from only 20% of the inputs. This is also known as the 80/20 rule. Given my obsession with not wasting my efforts on fruitless activities, you could say that I’m a disciple of the Pareto Principle. Just about everyone has heard of it before, but few people actually put it into practice.

Few people would dispute the validity of the 80/20 rule. So why then don’t we apply it? The answer? Laziness. Lazy thinking I should say. Being busy is a form of laziness. It means that you aren’t using your head to filter the unimportant tasks from your work or your life.

Let me give you some inspiration…

How to implement the Pareto Principle in your small business

Start with your marketing efforts

List everything you’re doing. Planning, advertising, customer satisfaction surveys, whatever the activity is. Which 20% are the most effective? What? You don’t know? Tsk-tsk…you should. You can’t afford to advertise simply to build your brand like a Coca-Cola can. Your marketing activities all need to have measurable results, so start measuring them!

Which 20% of your product line represents the bulk of your sales? Cut out excess SKUs. Simplify. If you ever watch Kitchen Nightmares, you’ll notice that one of the regular things that Ramsay does in a restaurant is to trim and simplify the menu. How much leaner, faster and more efficient would your whole operation become if you only dealt with one fifth of your current SKU mix?

The mistake most people make here is looking solely at the loss in revenue of cutting all of those products. If the principle holds true (and it almost always does), you’ll lose 20% of your revenues.  What they fail to do is to look instead at what would happen to net profit. What costs could you get rid of (advertising, displays, brochures, salespeople, operational expenses, inventory costs, and so on)? At the end of the day, you put net profits in your pocket, not revenues. The result on net profit is almost always positive.

Sales

How many meetings or presentations do you do with your prospects? Which 20% of the slides you show, which 20% of the meetings you hold or presentations you give are the most effective?

Which 20% of your salespeople get the bulk of your deals? Which leads to…

HR

Which 20% of your employees do 80% of the work? If you can cut out 80% of your excess activities, you should be able to trim your workforce considerably.

Operations

It’s tricky for me to give you generic operations examples since this will differ from business to business. But that’s unfortunate because it also happens to be one of the biggest areas for gains while applying the 80/20 rule. What I can do is point you at some places in your operations to look for opportunities:

Procurement

Which suppliers cause the most delays, the most quality issues, the worst A/R problems? Maybe that other supplier that costs a bit more per unit isn’t really more expensive after all?

Personnel

Actually, if you do the rest of this right, you’ll see that a good chunk of your workforce is currently busy working on that ineffective 80%. I think the answer here is obvious.

Process

This gets into a whole other subject, but what I like to do here is apply a sister concept to the Pareto Principle and that is Eli Goldratt’s Theory of Constraints. Put very simply, it says: look at your operations and identify the bottleneck(s). The rest of the process can only work as fast as the bottleneck can. I’ll come back and revisit the Theory of Constraints in another article as it’s too big to talk about here.

Inventory Management

If your business deals with large volumes of inventory, both raw materials, WIP and finished goods, this can be huge. I spent a good portion of my professional career dealing with inventory issues exclusively. It can have implications on re-ordering points and inventory management strategies by product. For example, if you apply the Pareto Principle to sales velocity by product, you can make inventory management decisions by classification. Monitor and reorder your A movers (your 20%) daily and physically store that product close to it’s point of use. For the rest, use a simple economic order quantity or just keep a minimum safety stock on hand.

If you really want to free yourself, not just in your business but your entire life, you need to ruthlessly apply this principle. Focus on the important, not the urgent. Don’t get caught up in being busy. Instead, concentrate on being effective.

Do you have examples of how the 80/20 rule has affected your business?

Welcome back again!