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Tuesday, June 21, 2016

The 80:20 Rule

Unless you are a newcomer to the business world, you have experienced, thought about, or been part of the 80:20 principle.

It first surfaced way back in 1896 when Vilfredo Pareto, an Italian economist, published a paper at the University of Lausanne. Pareto’s research illustrated that 80% of Italy’s land was owned by 20% of the population (and you thought income inequality was a new issue! Nope, remember Karl Marx). Pareto kept digging and found that across countries similar patterns existed. As late as 1989, looking at global GDP by quintile, the top 20% (quintile) produced 82.1% of the economic handle.

After World War II, a few others led by philologist George K. Aipf, picked up the Pareto mantle and the 80:20 principle was found to be widespread and some soon called it the “principle of least effort.”

The following items were often observed across the world:

--20% of employees were responsible for 80% of corporate output.

--80% of sales came from 20% of clients

--80% of profits came from 20% of customers

--In bookstores, 80% of sales came from 20% of titles

As more people examined it, the 80:20 principle started to creep in to management science or quasi-science. Some entrepreneurs failed as they did not leave tasks to others that they did not do well. They should have focused on the 20% at which they excelled.  The mantra was to work harder on elements that work harder for you and ultimately focus energy on what you enjoy.

Big companies often shed brands or divisions that were not profitable. Conglomerates often did not work out well so chieftains sold off the least profitable or most difficult areas and became stronger organizations.

Asking a few ad agency chiefs about 80:20 was interesting. Here are the two best comments:

--“No one wants to resign business unless the clients are complete bastards. Over the last few years, I saw 80:20 clearly in our P&L’s. So we have asked for big increases in compensation from a few clients. If they refused, we resigned them. We are a bit smaller but more profitable during a challenging time for shops our size. I wish that I had done this 10 years earlier but it takes guts.”

--“When you contacted me, I was afraid to answer but my partners urged me to tell the truth. Candidly, if we could start over tomorrow, we might only keep the 20% of our staff that is still growing and contributing a great deal. I think that if I were totally honest, I just might fire myself. It stuns me how 80:20 applies in so many areas.”

Recently, I had an experience with 80:20 that shook me to the core. I looked at my stock trading since 1973. Even a persnickety statistician would consider that to be a longitudinal study. And, my findings? You guessed it. Some 79.4% of my gains came from 20% of my holdings. Eerie, but true.

The 80:20 principle is alive and well!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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