To be a successful business leader you need the ability to produce a large quantity of high standard work consistently. In business productivity is the Holy Grail. If you can do ten things well instead of five then your efficiency and your contribution will double. You will flourish and so will your organisation.
The 80/20 rule - Pareto’s Principle
Pareto’s Law, based on the discoveries of a 16th century Italian statistician, is about focusing on what is really important. Stated simply this mean that the significant items in any group normally account for a relatively small proportion of the total.
For example, 80 percent of your sales probably come from 20 percent of your customers, or 80 percent of sales from 20 percent of products or services. Therefore, you can increase your effectiveness by concentrating most energy on this critical 20 percent, as any improvement here will bring you the best results.
For example, insurance companies know that 80 percent of car accidents are caused by 20 percent of drivers, so they charge these people much more to cover the higher risks involved.
Applying the rule to customers
How does the 80/20 rule apply to your customers? It is likely that your profitability depends mainly on your ability to satisfy just 20 percent of them. You can’t, of course, forget the other 80 percent completely, but you would need more than a 24-hour day to put equal emphasis on their demands.
The 80/20 rule can also be used to identify new business prospects. Analysing the top 20 percent of your customers should enable you to determine which customers, or types of customers, you need to target to win the best quality new clients.
Improve cash flow
On the accounts side, 80 percent of the money you are owed will probably be due from only 20 percent of your customers. In this instance, it is critical to chase large outstanding bills first, rather than going methodically through customer invoices from A to Z, irrespective of the amount owed.
Use it to cut costs
Another application is in saving money. For example, a change or decision that can save you œ100, but which will recur once a week (œ5,200 annual savings) is far more important than a decision on œ1,000 in an isolated situation that will not recur.
Manage your time better
You can apply Pareto’s Law in your work or job where hundreds of things need your attention.
Some things are very important, some less so, and others are worthless. Making the law work for you is learning how to prioritise. It means deciding the order in which jobs should be done, and how much time to allocate to each.
Distinguishing between urgent and important tasks is vital. Being urgent does not automatically make something important. Also, urgent jobs don’t always have the highest pay off.
They are often unplanned and generally get priority over important jobs. If you’re honest, you’ll probably find you spend 80 percent of your time achieving 20 percent of your goal-leaving just 20 percent of your time to achieve 80 percent of your goal. This is madness and obviously bad business sense. So can you find a way to deal with the time-consuming but non-revenue generating aspects in less time? Like delegating?
Once you’re skilled in this technique, you will find yourself spending more time on the important things. It’s not easy and you may have to do some careful planning initially, but once the processes and mechanisms are in place, you’ll end up being able to concentrate on what matters most.