The Pareto Principle, coined by Joseph Juran 40 almost years after Pareto’s observation of the 80-20 rule, applies to almost every facet of our lives. Pareto’s observation was that 20% of society owned 80% of the wealth. Juran used the 80/20 principle to imply that 80% of our quality control problems are caused by 20% of the components. One could argue that 80% of our customer service issues are generated by 20% of the customers.
The 80/20 principle should not be taken literally. The numbers could be 99/1, 95/5, 90/10, 85/15, or 60/40. The point is that there is an imbalance in the way things work and we need to focus on the things that matter if we are going to have better control or influence on our business, our lives, our problems, and our finances.
How the 80/20 rule is amplified by recessions and economic downturns
Have you ever heard of the saying, “the rich get richer?” This saying is often applied during recessions and depressions when “normal” people lose wealth while those with money gain wealth. The reason this happens is that people with money, particularly old money, tend to always have money. When the economy slides and prices fall, bargains become available. A normal family has to give up their home to foreclosure, which gives an investor a great opportunity to buy a nice home at a bargain price and then turn around and rent that home to the former owners. The same thing goes for businesses and other types of personal property.
How to apply the 80/20 rule to your advantage
There is also another saying that recessions are times when strong companies get stronger and weak companies get weaker, i.e., only the strong survive. The reason strong companies get stronger is because recessions are both reasons and opportunities to shed weight and unnecessary expenses. Smart companies apply the 80/20 principle to identify the 20% of their workforce that is doing 80% of the work. If a layoff has to occur, these are the ones to be kept while the remainder are let go. If you are an employee, make sure you are in the top 20%.
During economic downturns, smart companies will look at the 20% of their clients who produce 80% of their revenue and ensure that they do everything it takes to serve these clients well because if they don’t and these clients leave then these companies will have difficulty surviving a recession.
In uncertain times, smart companies will look to see the 20% of the activities that produce 80% of their profit and ensure that they focus hard on these activities and do these activities extraordinarily well. If a company needs to shed unproductive business units, then applying the 80/20 rule is a good way to help them prioritize which units to keep and which units to shed.
Focus on your core business
So, as we head into uncertain times, it is important that we focus on our core competencies. We need to carefully and tightly carve out our niche and be extraordinarily good at what we do. We need to understand and be conscious that time is money and we need to be focusing exclusively on the absolute most important activities possible … the ones that will result in real change or improvement to our business functions.
If we can afford to outsource or pay somebody else to do tasks that are not worth doing then we should. Otherwise, we should consider if these tasks are really worth doing. Focus is the key, focus to improve on the 20% that affects the 80%.