The 80/20 Principle

The principle of imbalance

Richard Koch, a former management consultant and investor, argues that the world is not balanced. A minority of causes, inputs or efforts usually produces a majority of results, outputs or rewards. The classic form is that about 20 percent of causes produce about 80 percent of results. Koch calls this the 80/20 Principle.

He stresses that the numbers are a shorthand. The real split might be 70/30, 90/10 or 99/1. The two numbers do not need to add up to 100, because they measure different things. The point is the imbalance: a small part of the input drives most of the output.

Examples he gives include:

• A minority of customers often brings in most of a company's profit.
• A small share of products produces most of the sales.
• A few people in an organization often create most of the value.
• A small share of your time produces most of your best work.

Most people assume a rough 50/50 world, where every customer, task or hour matters about the same. Koch argues that this assumption leads to waste. If you find the powerful minority and give it more resources, you get far better results with less effort.

Where the idea comes from

The principle is named after Vilfredo Pareto, an Italian economist. In the 1890s, Pareto studied patterns of wealth and income and noticed that a small share of the population held most of the wealth. He found similar skewed patterns across different countries and periods.

Koch traces how later thinkers built on the idea:

• George Zipf, a Harvard linguist, described a principle of least effort in the 1940s, observing that resources tend to arrange themselves in ways that minimize work.
• Joseph Juran, a pioneer of the quality movement, applied the idea to manufacturing defects. He spoke of the vital few and trivial many: a small number of causes produce most quality problems. His ideas were influential in Japanese industry after the Second World War.
• Koch also cites an often-repeated finding from early computing: most of a computer's running time was spent on a small share of its code, so improving that small share made systems much faster.

He links the principle to ideas from chaos theory and economics, such as feedback loops and tipping points. Small advantages compound. A product that gets an early lead attracts more buyers, which strengthens its lead. This, Koch argues, is why the world tends toward imbalance.

Two ways to use it: analysis and thinking

Koch describes two ways to apply the principle.

80/20 analysis is quantitative. You collect data, compare inputs with outputs and find the imbalance. For example, you rank customers by profit and see that the top 20 percent produce most of it. This needs numbers and is common in business.

80/20 thinking is a habit of mind. You do not need data. You ask, often and in every area of life: what is the vital few here, and what is the trivial many? Which 20 percent of my actions lead to 80 percent of my happiness? Which 20 percent of my effort leads to most of my results? Koch argues that this way of thinking is the more powerful of the two, because you can use it every day.

He gives some general rules for 80/20 thinking:

• Expect imbalance and look for it.
• Celebrate exceptional productivity rather than raising average effort.
• Look for the shortcut rather than running the whole course.
• Choose your aims with care, and pursue fewer of them.
• Do less, but do it with more focus.

A simple 80/20 review

Koch's approach lends itself to a regular review that anyone can run:

1. Pick one area, such as your customers, your weekly tasks or your spending.
2. List the inputs in that area and estimate the result each one produces.
3. Rank them from highest to lowest result.
4. Look for the break point, where a small group at the top produces most of the value.
5. Act on both ends: give the top group more time and resources, and reduce, delegate or drop the bottom group.

Repeat the review from time to time, because the vital few can change as conditions change.

The 80/20 Principle in business

The second part of the book applies the principle to companies.

Strategy. Koch argues that most companies have the wrong strategy because they do not know where their profit comes from. When costs are properly assigned, some products and customers turn out to be very profitable, while others lose money. He recommends that companies analyze profit by product, customer and segment, then focus on the most profitable parts and fix, reprice or exit the rest.

Simple is beautiful. Complexity is costly. Each extra product, supplier or process adds hidden overhead. Koch argues that simpler businesses with fewer products and customers often earn higher returns. He urges companies to cut complexity ruthlessly and focus on what they do best.

The right customers. A small group of core customers usually provides most of the profit. Koch recommends that a business identify these customers, serve them extremely well and keep them. It should be selective about the rest.

Decisions and projects. Most decisions are not important, so make them quickly. For the few that matter, gather the key data and think hard. In projects, simplify the goals, because most value comes from a few objectives. Koch also applies the principle to cost cutting, quality, marketing and negotiation. In each case the rule is the same: find the vital few and concentrate on them.

Work less, earn and enjoy more

The third part turns to personal life. Koch argues that the principle applies to how you spend your time, money and energy.

The time revolution. Koch claims that most of what we achieve at work and in life comes from a small share of our time. That means much of our time is spent on low-value activities. The answer is not better time management, which tries to squeeze more into the day. The answer is to change what you do with your time.

He suggests that you identify your achievement islands (short periods when you produced great results) and your happiness islands (periods when you felt most content). Then spend more time in those patterns and less elsewhere.

He lists low-value uses of time to cut, such as:

• Things other people want you to do that do not serve your aims.
• Things that have always been done a certain way.
• Things you are not good at or do not enjoy.
• Tasks that have already taken far longer than planned.

And high-value uses to expand, such as:

• Things that advance your overall purpose.
• Things you have always wanted to do.
• Things that use your best creative strengths.
• Things others say cannot be done, but that you have an insight into.

Be lazy and ambitious. Koch cites a classification of officers often attributed to a German general. The officers who are clever and lazy make the best leaders, because they find the most efficient path and do not waste energy. Koch argues that you should aim for high ambition with selective effort: do less, but choose the few things that matter.

Career. Koch applies the same lens to work. In many fields, a small group of top performers earns a large share of the rewards. So he advises that you specialize in a narrow area where you can be among the best, and choose an area you enjoy, since enjoyment and excellence tend to go together. He also encourages readers to work for organizations, or for themselves, in ways that let them capture more of the value they create.

Relationships. Koch argues that a small number of relationships provide most of the value and happiness in our lives. We have limited capacity for close relationships, so he advises that you invest heavily in a few people and choose your allies and mentors with care.

Money. He applies the principle to investing. He favors long-term investment in shares over bonds, a focus on a small number of strong holdings, and the habit of cutting losing investments while letting winners run.

Happiness. Koch suggests that happiness, like other results, comes from a few key sources. He describes seven daily habits of happiness: physical exercise, mental stimulation, a spiritual or artistic or meditative activity, doing a good turn for someone, taking a pleasant break with a friend, giving yourself a treat, and congratulating yourself on what you did well.

What the critics say

Critics point out that the 80/20 ratio is a rule of thumb, not a law of nature, and that the book often treats it as more precise than it is. Others note that strict 80/20 thinking can justify dropping customers, staff or activities whose value is hard to measure, and that the personal chapters rely more on assertion than on evidence.

Who should read it

This book suits managers, business owners and anyone who feels busy but not effective. It is most useful for readers who want a simple lens to decide what to focus on and what to drop.