But Not Necessarily The Only
by H. Peter Schiller, PMP
KISS. Keep It Super Simple. (Also, keep it simple, stupid.) Our gut instinct normally tells us to stick with the few, the simple, the vital. The 80/20 rule helps to back up that gut feeling. What is the 80/20 rule? How does it work? Does it always work?
Definition of the 80/20 rule
The 80/20 rule can also be called the 80/20 principle, Paretoís law, the rule of the vital few, etc. Italian economist Vilfredo Pareto (1848-1923) discovered the rule after looking at patterns of wealth and income in 19th century England.* Essentially the rule states that outcomes are predictably unbalanced. Here are some ways to state the rule:
The name of the rule misleads us into thinking the two numbers need to add up to 100 percent. The numbers donít have to be 80 and 20 nor do they have to add up to 100. In specific instances of the rule, the numbers could be 90/10, 85/12, 99/5, etc. The rule simply means that the greatest number of impacts come from a small number of sources. This small number of sources or causes is called the critical or vital few.
How 80/20 actually works
A great example of the 80/20 rule at work is the development of RISC (Reduced Instruction Set Computing). Computer engineers recognized a small percentage of computer instructions were used a large percentage of the time. Older technology using CISC (Complex Instruction Set Computing) typically takes 4 to 10 clock cycles of the processor to perform and for some instructions even more. The size of each CISC is not consistent and this requires the processor to determine how much room to allow for each instruction. RISC engineers focused on the critical few instructions. They optimized these instructions to all be the same size and to process typically in one clock cycle. When software developers needed functions not available within RISC, they simply used several RISC instructions that took the place of one long CISC instructions. Although this is an oversimplification, the benefits are real. RISC processors are smaller than CISC processors, cheaper to produce, less prone to overheating, and process more data than CISC processors with the same clock speed.
Letís take an example on the corporate level: Coke. According to their
website, Dr. John S. Pemberton in Atlanta, Georgia invented Coca-Cola in May
1886. During the first year, sales of Coca-Cola averaged nine
drinks a day, adding up to total sales for that year of $50. Since the year's
expenses were just over $70, Dr. Pemberton took a loss. Today, products
of The Coca-Cola Company are consumed at the rate of more than one billion
drinks per day. From a shareholder perspective, the Coca-Cola Company
has been phenomenal. Including dividend reinvestment and stock splits,
here is what Coca-Cola stock has done starting with its IPO in 1919:
Coke has done this by focusing on the vital few things that is does well: 1) a quality concentrate and syrup manufacturing process that is continually made more efficient, and 2) strong brand recognition that is continually perpetuated by effective marketing. Most of the companies that bottle Coca-Cola products are local and independent. The ultimate consumer of Coca-Cola beverages doesnít know or care how their drink made it way through Cokeís massive distribution system. This is a perfect example of the 80/20 rule at work because the Coca-Cola Company stays in aspects of the business where it adds superior value and keeps out of businesses where it does not.
Even in our personal financial lives the 80/20 rule impacts us. Take tax return preparation. The IRS provides thorough, easy to follow documentation. Yet, if you are like millions of others, you donít do tax return preparation. You either buy software to assist you or pay someone else to do it for you. Why? We only need to do our taxes annually and that is not frequent enough for us to bother making tax preparation one of our personal core competencies. We donít want to have to spend the time it takes to learn how do taxes quickly nor broaden our tax law knowledge to the point where we feel comfortable that we havenít missed anything important. Why is this an application of the 80/20 rule? Because we determine that tax preparation is not part of the critical few uses of our personal time that yields big benefits. We delegate this task to organizations or their software because we believe this is part of their critical few competencies.
Why 80/20 doesnít always apply
Now that youíre convinced that the 80/20 rule is the best thing since Coca Cola Classic, letís put that thought to rest. Weíll take a look at sleep. Sleep is primarily comprised of REM (rapid eye movement) sleep and non-REM (or deep) sleep. Scientists have determined that we do our dreaming during REM sleep and this helps regenerate our minds. REM sleep accounts for roughly 25 percent of our overall sleep. Generally deep sleep precedes REM sleep during the several sleep cycles we experience each night. Scientists have experimented on subjects by waking them every time they began REM sleep. Essentially each night the subject received all the deep sleep they normally do, but with little or none of their normal REM sleep. After several nights of this experimentation, many of the subjects became cranky, annoyed, impulsive, and hostile. Their learning ability and memory markedly decreased. On the surface this appears to vindicate 80/20 once again. If scientists could figure out a way for us to have just the REM sleep without all of that seemingly unnecessary deep sleep, we could get by with 2 hours of sleep per night! Our body causes this fallacy to disappear. While our mental faculties really benefit from REM sleep, our body needs the deep sleep to rejuvenate. No matter how the REM sleep to deep sleep ratio is computed, the 80/20 rule just canít be used.
Even in software development overuse of the 80/20 rule can bite you. At first glance, it seems to continue to reign supreme. A large percentage of the run-time of computer code actually executes only a small percentage of the actual lines of code. This is as it should be, because computer applications should spend most of their time executing code that meets usersí core needs. Why are all those other lines of code needed? (This discussion makes for all kinds of fun when software developers are asked why their code takes so long to develop.) A good portion of the code deals with initialization and wrap up logic. These are blocks of code that are only executed once to start up and end processes that may go through thousands or millions of iterations. Frequently programmers will put more code in the initialization routines to allow them to remove code from the routines that are performed multiple times. Another area of largely unused code is error processing. Often developers need to account for hundreds of esoteric conditions that rarely occur in normal processing. If this error handling was not in place, disaster would occur during these ďrareĒ occasions. Although the 80/20 rule looks applicable here, the so-called non-critical numerous items making up a large percentage of the software development effort really are vital and canít be conveniently axed.
80/20 calls for streamlining and simplification of processes and whole businesses. Diversified businesses should shed their marginally profitable products and focus on their core strengths. While this is usually true, does that always make sense? For example at the micro level, 80/20 says a supplier should remove the 80 percent of a productís sizes from their offerings and focus on the 20 percent that will allow them to maximize their profits. What if customers use the supplier because they carry all sizes? Following the 80/20 rule could kill the business. If we look at the macro level, many large corporations have diversified to reduce risk and allow them to grow. The 80/20 rule implies they should reduce or even stop such diversification efforts, but focus on the critical few. Why is that a problem? Sometimes new businesses need to be nurtured through a number of unprofitable years before they explode into highly profitable giants.
Balanced use of 80/20
How should we apply the 80/20 rule? Letís take our careers as an example. In the early phases of a career it is exceedingly important to apply 80/20 thinking. We need to become proficient in at least one critical area of our companyís needs. We many have a number of duties, but there needs to be at least one critical skill or performance domain at which we excel. This make us the ďgo toĒ person when there is a problem or opportunity in our special area of core expertise. Blindly following the 80/20 rule would indicate that we should only remain focused in this one area where we are part of the 20 percent of the people who produce 80 percent of the results. An unbalanced view of the 80/20 rule says we now sit on our laurels and let the rewards flow our way. This unbalanced view stagnates us. To broaden our horizons, we need to work on mentoring others, looking at how our area of expertise integrates into the ďbig pictureĒ, building a reputation as a leader, etc. To deepen expertise, we need to be aware of industry trends, join professional organizations, improve processes, etc. We need to make intelligent application of the 80/20 to better discern if we need more focus or more diversification.
The 80/20 rule should not be used as an excuse to keep the status quo. Once you find out the critical few things that make an operation successful, donít stop looking for improvement. The 80/20 rule doesnít imply a static event model. As things change, the critical 20 percent change also. Exploiting the 80/20 rule will initially lead to amazing results. To keep our results amazing, we have to make use of the additional time, money, authority, etc. that is now coming our way to keep our critical 20 percent pertinent to the vital areas that make us successful. This could mean improving the critical few attributes even more or taking the time to figure out the other 80 percent doesnít contribute as much as conventional wisdom dictates and making appropriate cutbacks. In other words, donít use the 80/20 rule as a justification to continue to use the same methods to achieve the same goals.
I already noted that in many (if not most) cases the activity outside the critical few still needs to happen. We should still apply the 80/20 rule, but with a slightly different twist. For instance, take the example of two hypothetical liquor stores. Bargain Booze, instead of having a critical few selling points, has a critical one selling point, price. Market research after market research shows that 95 percent of their customers buy at Bargain Booze because of price. Does that mean Bargain Booze should forget about customer service, variety of selection, convenient locations, and other key customer concerns? Absolutely not. Bargain Booze doesnít need to be superior at those other matters, but they need to at least meet some minimum requirements. Their low margins may not allow them to be in high traffic / high cost locations, but they would still need to be within relatively easy access of their target market. All In One Liquor, on the other hand, focuses on large selection that is always in stock coupled with high traffic locations. Even though All In One Liquor doesnít focus on price, they need to sell at relatively good price points. Work on getting an A+ in the vital few and get at least a passing grade on everything else. Use the 80/20 rule in balanced way.
The 80/20 rule is a good thing, but it doesnít always apply. Donít
use the 80/20 rule as some sort of cosmic mandate, but as a decision making
tool. At least 80 percent of the time.
H. Peter Schiller, PMP, currently works for Bank One as a Project Manager in their Retail Technology area. Please send your ridicule, praise, anecdotes, comments, etc. for Peter to firstname.lastname@example.org.
Many more articles in Performance Improvement in The CEO Refresher Archives