THE 80/20 PRINCIPLE by Richard Koch

• The principle allows us to enhance our achievement while escaping the tyranny of overwork.
• The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organization, and by every social grouping and form of society.
• The 80/20 Principle asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards.
• Pareto’s discovery: systematic and predictable lack of balance
• The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced.
• The reason that the 80/20 Principle is so valuable is that it is counterintuitive.
• The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance.
• Understanding the 80/20 Principle gives you great insight into what is really happening in the world around you.
• The common thread between chaos theory and the 80/20 Principle is the issue of balance—or, more precisely, imbalance. Both chaos theory and the 80/20 Principle assert (with a great deal of empirical backing) that the universe is unbalanced.
• Related to the idea of feedback loops is the concept of the tipping point.
• Eighty percent of the results come from 20 percent of the causes. A few things are important; most are not.
• The 80/20 Principle states that there is an inbuilt imbalance between causes and results, inputs and outputs, and effort and reward. Typically, causes, inputs, or effort divide into two categories:
• the majority, that have little impact
• a small minority, that have a major, dominant impact.
• Most important decisions have never been made by analysis and never will be, however clever our computers become.
• look for the short cut, rather than run the full course
• strive for excellence in few things, rather than good performance in many
• only do the thing we are best at doing and enjoy most
• in every important sphere, work out where 20 percent of effort can lead to 80 percent of returns
• For every step in your business process, ask yourself if it adds value or provides essential support. If it does neither, it’s waste. Cut it.
• Think small. Don’t plan to the nth degree on the first day. The return on investment usually follows the 80/20 rule: 80 percent of the benefits will be found in the simplest 20 percent of the system, and the final 20 percent of the benefits will come from the most complex 80 percent of the system.7
• The world is full of small causes that, when combined, can have momentous consequences.
• Events cannot be predicted, although predictable patterns tend to recur.
• The art of using the 80/20 Principle is to identify which way the grain of reality is currently running and to exploit that as much as possible.
• The 80/20 Principle is most useful when we can identify all the forces beneath the surface so that we can stop the negative influences and give maximum power to the most productive forces.
• Business strategy should not be a grand and sweeping overview. It should be more like an underview, a peek beneath the covers to look in great detail at what is going on.
• Unless your firm is very small and simple, it is almost certainly true that you make at least 80 percent of your profits and cash in 20 percent of your activity, and in 20 percent of your revenues. The trick is to work out which 20 percent.
• Most people prefer humans, but machines are more reliable and much cheaper. Machines may give 80 percent of the benefit at 20 percent of the cost.
• If you make most of your money out of a small part of your activity, you should turn your company upside down and concentrate your efforts on multiplying this small part.
• People in general have so little and it costs so much to buy even the barest necessities (let alone the luxuries to which I think everyone is entitled) because nearly everything we make is much more complex than it needs to be.
• Business people seem to love complexity.
• Additional scale, without additional complexity, will always give lower unit costs. To deliver to one customer more of one product or service, provided that it is exactly the same, will always raise returns.
• Internal complexity has huge hidden costs
• It is not that small is beautiful. All other things being equal, big is beautiful. But all other things are not equal. Big is only ugly and expensive because it is complex. Big can be beautiful. But it is simple that is always beautiful.
• What is most simple and standardized is hugely more productive and cost effective than what is complex.
• Always try to identify the simplest 20 percent of any product range, process, marketing message, sales channel, product design, product manufacture, service delivery, or customer feedback mechanism. Cultivate the simplest 20 percent. Refine it until it is as simple as you can make it. Standardize delivery of a simple product or service on as universal and global a basis as possible. Pass up thrills, bells, and whistles. Make the simplest 20 percent as high quality and consistent as imaginable. Whenever something has become complex, simplify it; if you cannot, eliminate it.
• Volume leads to marginal products, marginal customers, and greatly increased managerial complexity.
• Complexity is stimulating and intellectually challenging; it leavens boring routine; and it creates interesting jobs for managers.
• All organizations, especially large and complex ones, are inherently inefficient and wasteful. They do not focus on what they should be doing. They should be adding value to their customers and potential customers. Any activity that does not fulfill this goal is unproductive. Yet most large organizations engage in prodigious amounts of expensive, unproductive activity.
• Most activity results in little value and little change. A few powerful interventions have massive impact.
• waste thrives on complexity; effectiveness requires simplicity
• major improvements are always possible, by doing things differently and by doing less.
• Do not tackle everything with equal effort.
• a minority of business activity is useful
• The large and simple business is the best.
• The way to create something great is to create something simple. Anyone who is serious about delivering better value to customers can easily do so, by reducing complexity.
• Progress requires simplicity, and simplicity requires ruthlessness. This helps to explain why simple is as rare as it is beautiful.
• Successful marketing is all about a focus on the relatively small number of customers who are the most active in consuming your product or service.
• Serving the core 20 percent of customers must be a company-wide obsession
• Only train those who you are reasonably sure plan to stick around with you for several years.
• Invest the most training in those who perform best after the first series of training. Take the best 20 percent of the trainees and invest 80 percent of the training effort in them. Stop training the bottom 50 percent, unless it is clear that you are obtaining a good payback even on this effort.
• Some customers are vital. Most are not.
• The versatility of the 80/20 Principle is legion: it can be used in almost any area of function to direct strategic and financial improvement.
• Five rules for decision making with the 80/20 Principle
• Rule one says that not many decisions are very important.
• Rule two affirms that the most important decisions are often those made only by default, because turning points have come and gone without being recognized.
• The third rule of 80/20 decision making is for important decisions: gather 80 percent of the data and perform 80 percent of the relevant analyses in the first 20 percent of the time available, then make a decision 100 percent of the time and act decisively as if you were 100 percent confident that the decision is right.
• Fourth, if what you have decided isn’t working, change your mind early rather than late.
• Finally, when something is working well, double and redouble your bets.
• Nearly all businesses have far too much stock, partly because they have too many products and partly because they have too many variants of each product.
• For any given number of products, you should cut down on the number of variants, starting with the slowest movers.
• Do not listen to anyone who tells you that the slow movers are really needed. If this was so, they’d move much faster.
• In all cases, progress is being driven by focus: focus on the most important customers, focus on a simple product line, simply tracked and simply delivered.
• The art of the project manager is to focus all team members on the few things that really matter.
• First, simplify the task. A project is not a project: almost invariably, a project is several projects.
• Eighty percent of the value of any project will come from 20 percent of its activities, and the other 80 percent will arise because of needless complexity. Therefore do not start your project until you have stripped it down to one simple aim.
• A few things are always much more important than most things
• Accounting systems are the enemy of fair rewards, because they are absolutely brilliant at obscuring where the money is really being made.
• Success is undervalued, undercelebrated, and underexploited.
• There are two forms of money leverage. One is borrowing. The other is using other people’s money (OPM) as equity rather than debt.
• Ruthlessly prune 80 percent activities.
• Action drives out thought.
• Progress springs from identifying the waste and suboptimality inherent in life, starting with our daily lives, and then doing something about it.
• The power of the 80/20 Principle lies in doing things differently based on unconventional wisdom. This requires you to work out why most other people are doing things wrongly or to a fraction of their potential. If your insights are not unconventional, you are not thinking 80/20.
• Linear thinking is attractive because it is simple, cut and dried. The trouble is that it is a poor description of the world and an even worse preparation for changing it.
• Most great achievements are made through a combination of steady application and sudden insight.
• Most of what any of us achieve in life, of any serious degree of value to ourselves and others, occurs in a very small proportion of our working lives.
• Achievement is driven by insight and selective action.
• Our lives are profoundly affected, for good and ill, by a few events and a few decisions.
• Most of our successes come from races we ourselves want to enter.
• One of the most important decisions someone can make in life is their choice of allies. Almost nothing can be achieved without allies.
• Happiness, like the mind, will atrophy if not exercised.
• Society is divided into those who have money but no time to enjoy it and those who have time but no money.
• Productivity on most projects could be doubled simply by halving the amount of time for their completion.
• Do the things that you like doing. Make them your job. Make your job them. Nearly everyone who has become rich has had the added bonus of becoming rich doing things they enjoy.
• The modern world would greatly benefit if a lower quantity of work led to a greater profusion of creativity and intelligence.
• Free yourself from obligations imposed by others
• It is very difficult to make good use of your time if you don’t control it.
• Be unconventional and eccentric in your use of time
• A good exercise is to work out the most unconventional or eccentric ways in which you could spend your time: how far you could deviate from the norm without being thrown out of your world. Not all eccentric ways of spending time will multiply your effectiveness, but some or at least one of them could.
• Your basic objective, when you have identified both the specific activities and the general type of activity that take 20 percent of your time but yield 80 percent of happiness or achievement, should be to increase the 20 percent of time spent on those and similar activities by as much as possible.
• You can only spend time on high-value activities (whether for achievement or enjoyment) if you have abandoned low-value activities.
• Be ruthless in cutting out these activities. Under no circumstances give everyone a fair share of your time. Above all, don’t do something just because people ask, or because you receive a phone call or a fax.
• Things that matter most Must never be at the mercy of things that matter least.
• Most of us don’t work out what we want. And most of us end up with lopsided lives as a result.
• Work is a key part of life, one which should be neither overdone nor underdone.
• Remember that enthusiasm can lead to success.
• Large organizations still provide structure and status even if they can no longer provide security.
• Once in your profession, if making money is really important to you and if you are any good at what you do, you should aim to become self-employed as soon as possible and, after that, to start to employ others.
• The workers who are above average will tend to be paid more than those who are below average, but nowhere near enough to reflect the differential in performance. It follows that the best people are always underpaid and the worst people always overpaid. As an above-average employee, you cannot escape from this trap.
• Money can buy you happiness, but only to the extent that you use money to do what is really right for you in the first place.
• Remember that the more money you have, the less value an extra dollop of wealth creates. In economist speak, the marginal utility of money declines sharply.
• It is important to focus on what you find easy.
• Pursue those few things where you are amazingly better than others and that you enjoy most.
• Go for quality rather than quantity. Spend your time and emotional energy reinforcing and deepening the relationships that are most important.
• You alone cannot make yourself successful. Only others can do that for you. What you can do is to select the best relationships and alliances for your purposes.
• Focus your attention on nurturing the key alliances of your life.
• In general, the people who have helped you the most in the past will also be the people who can do so in the future.
• The best relationships are built on five attributes: mutual enjoyment of each other’s company, respect, shared experience, reciprocity, and trust.
• The key to becoming a star is to simulate, manufacture, and deploy lazy intelligence.
• The key to earning more and working less is to pick the right thing to do and to do only those things that add the highest value.
• A small percentage of professionals obtain a disproportionate amount of recognition and fame and usually also a high percentage of the spoils available.
• The most persuasive explanation is that two conditions facilitate superstar returns. One is that it is possible for the superstar to be accessible to many people at once. Modern communications enable this to happen.
• The second condition for superstar returns is that mediocrity must not be a substitute for talent. It must be important to obtain the best.
• 10 golden rules for career success
• 1 Specialize in a very small niche; develop a core skill
• 2 Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
• 3 Realize that knowledge is power
• 4 Identify your market and your core customers and serve them best
• 5 Identify where 20 percent of effort gives 80 percent of returns
• 6 Learn from the best
• 7 Become self-employed early in your career
• 8 Employ as many net value creators as possible
• 9 Use outside contractors for everything but your core skill
• 10 Exploit capital leverage
• Specialization is one of the great, universal laws of life.
• A small business that does not specialize will die. An individual who does not specialize will be doomed to life as a wage slave.
• Find your niche. It may take you a long time, but it is the only way you will gain access to exceptional returns.
• Choose a niche that you enjoy and in which you can excel
• The key to making a career out of an enthusiasm is knowledge. Know more about an area than anybody else does. Then work out a way to marketize it, to create a market and a set of loyal customers.
• Do not stop improving your expertise until you are sure you know more, and are better in your niche, than anybody else. Then reinforce your lead by constant practice and inveterate curiosity. Do not expect to become a leader unless you really are more knowledgeable than anyone else.
• Your market is those people who might pay for your knowledge. The core customers are those who would value your services most.
• In every market, for every customer, in every firm, in all professions, there is a way to do things more efficiently and effectively: not just a bit better, but a step-function better. Look beneath the surface for 80/20 truths in your profession or industry.
• The answer will lie with the industry heretics, the professional mavericks, and the eccentric individuals.
• Those who are best in any sphere do not think and act in similar ways to the average performers.
• Be willing to pay a high price to work for the best. Find any excuse to spend time with them.
• 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.
• corporations typically have far too many managers and the net value added by a majority of them is actually negative.
• Use outside contractors for everything but your core skill
• The most successful professional firms and corporations are those that outsource everything but what they are best at.
• Keep your own firm as simple as possible and purely focused on those areas where it is several times better than the competition.
• 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.
• 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.
• 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.
• You are more likely to become wealthy, or to obtain the greatest increase in wealth, from investment income rather than from employment income. This means that there is a premium on accumulating enough money early on to fund investment.
• Because of the compounding effects of investment, you can become rich either by starting to invest early in life, or by living a long time, or both.
• A key to successful personal investing is to match your personality and skills to one of a number of proven techniques.
• Koch’s 10 commandments of investment
• 1 Make your investment philosophy reflect your personality
• 2 Be proactive and unbalanced
• 3 Invest mainly in the stock market
• 4 Invest for the long term
• 5 Invest most when the market is low
• 6 If you can’t beat the market, track it
• 7 Build your investments on your expertise
• 8 Consider the merits of emerging markets
• 9 Cull your loss makers
• 10 Run your gains
• Being proactive means that you take charge of your investment decisions yourself.
• Invest mainly in the stock market
• The best use of wealth is usually to create a new lifestyle where you can choose how to spend your time, to pursue a career or work activity that you would most enjoy.
• Use the price/earnings ratio (P/E) as the best single benchmark for deciding whether shares are expensive or cheap.
• Index tracking is fairly low risk and yet, over the long term, should deliver high returns.
• The whole essence of the 80/20 philosophy is to know a few things well: to specialize.
• To succeed, you must aim for the top. To get there, you must turn yourself into a business. To obtain maximum leverage, you must employ a large number of people. To maximize the value of your business, you must use other people’s money and exploit capital leverage—to become even larger and more profitable.
• Those who are happy with most of their lives are more likely to be happier overall. Those whose happiness is highly concentrated in short bursts are likely to be less happy with life overall.
• TWO WAYS TO BE HAPPIER
• Identify the times when you are happiest and expand them as much as possible.
• Identify the times when you are least happy and reduce them as much as possible.
• Spend more time on the type of activities that are very effective at making you happy and less time on other activities. Start by cutting off the “valleys of unhappiness,” the things that tend to make you actively unhappy. The best way to start being more happy is to stop being unhappy.
• Emotional intelligence is more crucial for happiness than intellectual intelligence, yet our society places little emphasis on the development of emotional intelligence.
• We can train ourselves to break the self-reinforcing pattern of depression by simple steps, such as seeking out company, changing our physical setting, or forcing ourselves to exercise.
• Your feeling of being unsuccessful limits your success and your happiness.
• you can make yourself happy or unhappy just by the way that you decide to feel.
• A positive self-image is essential to happiness. A sense of self-worth can and should be cultivated.
• If the best way to start being happy is to stop being unhappy, the first thing we should do is to avoid situations and people that tend to make us depressed or miserable.
• Happiness is profoundly existential. Happiness only exists now. Past happiness may be remembered or future happiness planned, but the pleasure this gives can only be experienced in the “now.”
• Another key component of a happy day is mental stimulation.
• Lack of control is the root cause of much unease and uncertainty.
• Setting reasonable and attainable goals is the second shortcut to happiness.
• The third shortcut is to be flexible when chance events interfere with plans and expectations
• Fourth, develop a close relationship with a happy partner.
• The fifth shortcut is to cultivate close friendships with a few happy friends.
• Shortcut six is similar to five: develop strong professional alliances with a small number of people whose company you enjoy.
• The final shortcut to lasting happiness is to evolve the lifestyle you and your partner want.