The 80/20 Principle: The Secret of Achieving More With Less (30 page)

What are the 80/20 truths in your line of business? Where do corporations make supranormal, even obscene, profits? Which of your colleagues is riding high while always seeming relaxed, with time to indulge themselves in their favorite hobbies? What are they doing that’s so cute? Think, think, think. The answer is there somewhere. All you have to do is find it. But don’t ask the industry Establishment what the answer is, don’t do a survey of your colleagues, and don’t try to find the answer in print. All you will find is the conventional wisdom, repeated a zillion ways. The answer will lie with the industry heretics, the professional mavericks, and the eccentric individuals.

Learn from the best

The winners in any field have, almost by definition, found ways to make 20 percent of effort yield 80 percent of results. This does not mean that the leaders are lazy or lacking in dedication. Leaders usually work very hard. But their output, for no more time than is put in by the merely competent in their field, is several times more valuable than the output of the merely competent. The leaders produce results which, in both quality and quantity, knock spots off the competition.

Put another way, leaders do things differently. Leaders are usually outsiders; they think and feel differently. Those who are best in any sphere do not think and act in similar ways to the average performers. The leaders may not be conscious of what they do differently. Very rarely do they think about it and articulate it. But, if leaders do not generally explain the secrets of their success, these can often be deduced by observation.

Previous generations understood this well. The disciple sitting at the feet of the master, the apprentice learning a trade from a craftsman, the student learning by assisting a professor with research, the artist serving time with an accomplished artist: all learnt by observing the best in their field at work, by assisting and by imitating.

Be willing to pay a high price to work for the best. Find any excuse to spend time with them. Work out what their characteristic ways of operating are. You will find that they see things differently, spend time differently, and interact with other people differently. Unless you can do what they do, or something even more different from the average modus vivendi in the profession, you will never rise to the top.

Sometimes, it is not just a matter of working for the best individuals. Key know-how can be located within the collective culture of the best firms. The key is in the differences. Arguably, you should work for one of the average firms, then for one of the very best, and observe the differences. For instance, I worked for Shell and wrote lots of memos. I then went to work for one of the Mars companies and learned to talk to people face to face until I got the desired answers. The latter was a 20/80 practice: 20 percent of effort leading to 80 percent of results. Leaders have many such 20/80 practices.

Observe, learn, and practice.

Become self-employed early in your career

Leverage your own time so that you focus on the things where you add five times more value than elsewhere. The second step is to ensure that you capture as much of this value for yourself. The ideal position, one that you should aim to reach early in your career, is to capture all of the value of your work for yourself.

Karl Marx’s theory of surplus value states that the workers produce all value and excess value is appropriated by the capitalists who employ the workers. Put crudely, profits are the excess value stolen from the workers.

The theory is nonsense, but can usefully be stood on its head. The ordinary employee who produces average results may actually be exploiting the corporation more than he or she is exploited: corporations typically have far too many managers and the net value added by a majority of them is actually negative. Yet the employee who uses the 80/20 Principle properly will probably be many times more effective than the average. The 80/20 employee is most unlikely to be paid several times what his or her peers are. The 80/20 employee will therefore probably obtain a better deal by becoming self-employed.

When you are self-employed, you get paid by results. For those who use the 80/20 Principle, this is good news.

The one circumstance in which it may not be appropriate to become self-employed yet is when you are still in the rapid learning stage. If a corporation or professional firm is teaching you a great deal, the value of this learning may exceed the differential between the value you add and what you are paid. This is typically the case during the first two or three years of a professional career. It can also be the case when more experienced professionals join a new firm that has higher standards than the ones in which they have previously worked. In this case, the period of superlearning usually lasts for a few months only, or a year at the most.

When these periods are over, become self-employed. Do not worry overmuch about security. Your professional expertise and use of 80/20 precepts constitute your security. In any case, firms can no longer deliver security.

Employ as many net value creators as possible

If the first stage of leverage is the best use of your time and the second stage is to ensure that you capture for yourself the value you create, the third stage is to leverage the power of other people.

There is only one you, but there are a very large number of people whom you could potentially employ. A minority of these people—but the minority from which the 80/20 practitioner will choose to hire—add a great deal more value than they cost.

It follows that the greatest source of leverage is other people. To some extent, you can and should leverage off other people whom you do not employ: your allies. But you can obtain the most direct and complete leverage from the people you employ.

A simple numerical illustration may help to focus the mind on the enormous value of employment leverage. Let us assume that by using the 80/20 Principle you become five times more effective than the average professional in your line of business. Let us also assume that you are self-employed and so capture all of this value. The best that you will do, therefore, is to get results 500 percent of the average. Your “surplus” over the average is therefore 400 units.

But let us now assume that you can identify 10 other professionals, each of whom is, or can be trained to become, three times better than the average. They are not as good as you are, but they still add much more value than they cost. Let us also assume that in order to attract and retain these people, you pay them 50 percent more than the going rate. Each one of them will produce 300 units of value and cost 150 units. You therefore make a “profit,” or capitalistic surplus, of 150 units for each employee. By hiring the 10, you therefore have another 1,500 surplus units to add to the 400 extra units that you yourself are creating. Your total surplus is now 1,900 units, nearly five times as much as before you started hiring.

Naturally, you do not have to stop at 10 employees. The only constraints are your ability to find employees who add surplus value and your ability (and theirs) to find customers. The latter constraint should not normally operate in the absence of the former, since professionals who add excess value should normally find a ready market for their services.

Clearly, it is crucial to hire only net value creators: those whose value comfortably exceeds their cost. But it would be wrong to say you should only hire the best. The most excess value is created by employing as many excess value creators as possible, even if some of them are only twice as good as the average whereas others may be five times (or even more) as effective. Within your own workforce, there is still likely to be an 80/20 or 70/30 distribution of effectiveness. The greatest absolute surplus value may coexist with a fairly skewed distribution of talent. The only requirement is that your least supereffective employee still adds more value than he or she costs.

Use outside contractors for everything but your core skill

The 80/20 Principle is a principle of selectivity. You achieve maximum effectiveness by concentrating on the fifth of activities at which you are the best. This principle applies not just to individuals but to firms as well.

The most successful professional firms and corporations are those that outsource everything but what they are best at. If their skill is marketing, they do not manufacture. If their real advantage is in research and development, they use third parties not just for making the goods, but for marketing and selling them. If they are best at volume manufacture of standardized products, they do not make “specials” or up-market varieties. If they are best at high-margin specials, they do not try their hand in the mass market. And so on.

The fourth stage of leverage is to use outside contractors as much as possible. Keep your own firm as simple as possible and purely focused on those areas where it is several times better than the competition.

Exploit capital leverage

So far we have advocated labor leverage, but you can also benefit from capital leverage.

Capital leverage is using money to capture additional surplus value. At its most basic, it means buying machines to replace labor whenever the machines are more cost effective. Today the most interesting examples of capital leverage involve the use of money to “roll out” good ideas that have already proven themselves in particular local circumstances. In effect, the capital is used to multiply frozen know-how captured in a particular formula. Examples include all forms of software distribution, the rollout of fast-food (and increasingly not-so-fast-food) restaurant formulae such as McDonald’s and the globalization of soft drinks supply.

SUMMARY

Rewards increasingly demonstrate the 80/20 Principle: the winners take all. Those who are truly ambitious must aim for the top in their field.

Choose your field narrowly. Specialize. Choose the niche that is made for you. You will not excel unless you also enjoy what you are doing.

Success requires knowledge. But success also requires insight into what delivers the greatest customer satisfaction with the least use of resources. Identify where 20 percent of resources can be made to deliver 80 percent of returns.

Early in your career, learn all there is to be learned. You can only do this by working for the best firms and the best individuals within them, “best” being defined with reference to your own narrow niche.

Obtain the four forms of labor leverage. First, leverage your own time. Second, capture 100 percent of its value by becoming self-employed. Third, employ as many net value creators as possible. Fourth, contract out everything that you and your colleagues are not several times better at doing.

If you do all this, you will have built your career into a firm, your own firm. At this stage, use capital leverage to multiply its wealth.

MULTIPLYING MONEY

If you are interested in a successful career, you are probably also interested in multiplying your money. As we shall see in Chapters 14 and 15 respectively, this is both easier, and less worthwhile, than is commonly thought.

14

MONEY, MONEY, MONEY

To every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.

M
ATTHEW
25:29

This is another optional chapter, designed for those who have some money and wish to know how to multiply it.

If the future is at all like the past, it is quite easy to multiply money. All you need to do is put it in the right place and then leave it there.
¹

MONEY OBEYS THE 80/20 PRINCIPLE

It is no accident that Vilfredo Pareto discovered what we now know as the 80/20 Principle when he was researching the distribution of incomes and wealth. He found that there was a predictable and highly unbalanced distribution of money. Money, it seems, dislikes being equally distributed:

• Unless redistributed by progressive taxation, incomes tend to be unequally distributed, with a minority gaining most of aggregate income.

• Even with progressive taxation, wealth follows an even more unequal pattern than incomes; it is even harder to make wealth equal than to make incomes equal.

• This is because the majority of wealth is created from investment rather than from income; and because investment returns tend to be even more unbalanced than income returns.

• Investment creates high amounts of wealth because of the phenomenon of compounding. For example, the value of shares may increase by 12.5 percent per annum, on average. This means that $100 invested in 1950 would be worth around $22,740 today. In general, real investment returns (after taking out the effects of inflation) are highly positive, except when inflation is rampant.

• The compounding returns of investment are highly differential: some investments are much better than others. This helps to explain why wealth becomes so unequally distributed. It makes a huge amount of difference whether you compound wealth at annual rates of, say, 5, 10, 20, or 40 percent. $1,000 compounded over 10 years at these rates would produce, respectively, $1,629, $2,593, $6,191, or $28,925! For eight times the annual return, compounding at 40 percent produces a return nearly 18 times higher than compounding at 5 percent; and the results become even more skewed the longer we go on.