The 80/20 Principle builds on the idea that 80 percent of all our business and life results stem from 20 percent of our efforts. The 80/20 principle argues that little of what we spend our time on actually counts. However, by concentrating on those aspects that do count, we can unlock the enormous potential of the magic 20 percent. You can transform your effectiveness in your job, your career, your business, and your life.
About Richard Koch
Richard Koch is a former management consultant and entrepreneur. He is also a writer of several books on applying the Pareto principle (80/20 rule) in all walks of life. Richard’s investments have included Filofax, Plymouth Gin, the Great Little Trading Company, and Betfair. Previously, he had been a consultant at Boston Consulting Group and later a partner at Bain and Company. After this, he started a management consulting firm, L.E.K. Consulting, with Jim Lawrence and Iain Evans.
“Probability theory tells us that it is virtually impossible for all the applications of the 80/20 Principle to occur randomly, as a freak of chance. We can only explain the principle by positing some deeper meaning or cause that lurks behind it. Pareto himself grappled with this issue, trying to apply a consistent methodology to the study of society. He searched for “theories that picture facts of experience and observation,” for regular patterns, social laws, or “uniformities” that explain the behavior of individuals and society. Pareto’s sociology failed to find a persuasive key. He died long before the emergence of chaos theory, which has great parallels with”– Richard Koch
Spotting the Important Features
The effect of 80/20 thinking is the ability to spot the important facets of our environment and circumstances. Richard Koch describes 80/20 thinking as being reflective, unconventional, hedonistic, strategic, and nonlinear. To think in this way, you have to adopt an extreme form of ambition whereby you want to change everything for the better. However, you must not translate this approach into arrogance. Instead, you should adopt a relaxed and confident manner.
Maintaining a Reflective Approach
The modern way of thinking emphasizes rushed action instead of reflection. This type of thinking neglects the preciousness of quiet contemplation. Koch recommends you leave action behind until you have effectively reflected on your thoughts and insights. Then, once you have narrowed your potential options, you can produce more appropriate action. The reflective approach should provide you with far more impressive results and require less energy and fewer resources.
80/20 Thinking Is Unconventional
80/20 thinking prevents you from adhering to standard approaches. You have the opportunity to challenge preconceived ideas and discover where conventional wisdom is wrong. Koch highlights that conventional wisdom is actually generally wrong. Hence, try to do things differently based on unconventional wisdom.
The Nonlinear Nature of 80/20 Thinking
Conventional thinking utilizes a linear mental model. However, Koch claims that linear models can be inaccurate and destructive. Significantly, we easily fall back into linear models as they are simple. We do not reap the benefits of this type of mental model, though. Linear models do not place us in a strong position to change the world. Linear thinking is something that scientists and historians neglected long ago; therefore, we should follow suit and do the same. Aim to examine nonlinear relationships that others are neglecting. Only a few decisions matter, and they matter a great deal.
“Not only is happiness not money, it is not even like money.”– Richard Koch
Society tends to equate happiness with having and spending money. However, money and happiness should be spent and saved in very different ways. Money has the potential for compound interest. You can save and invest money, and it will multiply through compound interest. The same cannot be said for happiness. You cannot save today’s happiness to spend tomorrow. In fact, Koch argues that avoiding happiness will lead to atrophy. Just like your muscles, without appropriate exercise your ability to generate happiness will become weaker. Those who adopt 80/20 happiness understand what generates happiness and actively pursue happiness generators. This is how you can build a compound interest in happiness. You should not save your happiness; instead, spend your happiness and actively seek it today to reap benefits tomorrow.
Koch notes that 80% of our achievement and happiness takes place in 20% of our time. However, we can heavily expand these peaks by seeking more happiness. The most effective way of doing this is by recognizing the factors that instigate happiness and making decisions based on this information.
Everybody has the potential to achieve something significant in their lives. Koch argues that effort is not the key to this success, though. Instead, you simply need to find the right thing to achieve. You will be more productive in specific areas than others. Therefore, do not dilute your effectiveness by focusing on areas where you are less productive or skillful. Plus, avoid engaging with areas that others suggest suit us. Your success will come from choosing the areas you want to engage with.
Typically, 80% of one’s increase in wealth is associated with fewer than 20% of their investments. This rule applies to long-term portfolios. Therefore, you need to ensure the 20% you are choosing is well-researched. These successful investments should be allowed to compound. Taking profit on your 20% as soon as it rises won’t lead to you going broke. However, people don’t become rich by following the same procedure. Therefore, consider holding onto sound investments if they are still performing well. There is no legitimate reason to get out on an investment.
Again, society places significant importance on having several allies and relationships. However, you do not need many relationships to be successful. Instead, you just need to ensure you have the right relationships. Additionally, the right relationships will depend upon the time in your life and your current environment. Crucially, no matter these factors, your relationships should always be built on a common interest in advancing your interests.
Again, 20% of your relationships will constitute 80% of the positive impact on your interests. Therefore, do not assume that all your relationships are of equal importance. Instead, focus most of your attention on nurturing the alliances you have identified as the most important. These alliances will be crucial to your success, as you alone cannot make yourself successful.
An effective approach is to develop alliances with people who have alliances between themselves.
80% of the value in any organization or profession comes from 20% of the professionals. Generally, this 20% will be earning slightly more money than the 80%. However, this difference in pay does not accurately reflect the difference in performance. Subsequently, the best people are always underpaid, and the worst people are always overpaid.
Therefore, as a worker, you must take advantage of this system. Instead of wasting your time working extremely hard across several areas, you should only engage with the highest value activities. Koch describes this as being intelligent and lazy. The activities with the highest value are those that produce 80% of returns from just 20% of the effort.
In life, there are always winners and losers. Importantly, there are always more losers than winners. Therefore, you must choose the right competition, the right team, and the right methods to increase your chances of winning. Koch calls this rigging the odds in your favor.
80/20 Time Management
80% of achievement is attained in 20% of the time taken. Conversely, 80% of time spent leads to only 20% of output value. Based on these statistics, Koch points out that most of our actions are ’low value’ actions. Therefore, we need to maximize our use of time. This does not mean we should view time as our enemy. Instead, Koch recommends treating time as your friend. In this way, place yourself in comfortable, relaxed, and collaborative positions so you can use time as an opportunity. Don’t waste your time trying to make marginal improvements to your productivity within your available time. Alternatively, consider doubling your time spent on the top 20% of activities. Koch believes this one act would allow us to get a 60% greater output within just a two-day week.
Avoid Glorifying Hard Work
“It may be that you will be happiest in the rat race; perhaps, like me, you are basically a rat.”– Richard Koch
Effort is not always associated with reward. Therefore, we need to make a conscious effort away from the traditional ideal of a strong work ethic bringing success. Humans actually naturally enjoy hard work. However, the only reason we enjoy hard work is the feeling of virtue we receive from working hard. Hard work is generally associated with low returns. Comparatively, insight, and engaging with the actions we want leads to superior returns.
The Top 10 Low-Level Activities
Koch highlights there are low-level activities that will often fill your time and prevent you from engaging with high-level activities. Specifically, he highlights ten specific low-level activities that people often struggle with:
- Things other people want you to do.
- Things that have always been done this way.
- Things you’re not particularly good at doing.
- Things you don’t enjoy doing.
- Things that are always interrupted.
- Things few other people are interested in.
- Things that have already taken twice as long as you originally expected.
- Things where your collaborators are unreliable or low quality.
- Things that have a predictable cycle.
- Answering the telephone.
The Top 10 Highest Value Activities
Conversely, Koch also highlights the high-level activities that you should incorporate into your life. If you start spending more time on these activities, you will increase your chances of success.
- Things that advance your purpose in life.
- Things you have always wanted to do.
- Things already in the 20/80 relationship of time to results.
- Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results.
- Things other people tell you can’t be done.
- Things other people have done successfully in different areas.
- Things that use your own creativity.
- Things that you can get other people to do for you with relatively little effort on your part.
- Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively.
- Things for which it is now or never.
One of the most common mistakes within businesses is doing too many things for too many people. However, the reality is that a few factors are much more important than most things. Additionally, a few people add most of the value to your business. The best people generate enormous surpluses, usually far beyond what they are allowed to take out. Therefore, prioritize hiring people who fit the mold of your best-performing employees.
Your marketing should always be centered upon your most important customers. Generally, a significant minority of your customers are the ones who will buy the majority of your products. A vast number of people will buy little of your products. Therefore, you can ignore marketing to this majority. Aim to keep your best customers forever.
Koch offers three golden rules for marketing to the 20%:
- Focus on providing a stunning product and service to 20% of the existing product line. This is the part that generates 80% of profit.
- You will only be successful in marketing if what you are marketing is unique or better value than products available elsewhere.
In the short term, marketing to the minority might not seem effective. However, you are bound to substantially enhance your profit in the long term if you focus on the 20% of your customers. This is because a business’ health should not be based on short-term profitability. Instead, it should be based on strength, depth, and length of its relationship with its core customers.
Making Data-Driven Decisions
Koch suggests you gather 80% of the data and perform 80% of the relevant analysis in the first 20% of the time available. Ensure you make a decision 100% of the time and act decisively as if you have 100% confidence.
80/20 Project Management
Effective project management relies on focusing all team members on the things that really matter. Koch offers an outline of how to plan a project using the 80/20 rule:
- In the planning phase, write down all critical issues you’re trying to resolve. If there are more than 7, bump off the least important.
- Construct hypotheses on what the answers are, even if it’s pure guesswork.
- Work out what information needs to be gathered to resolve whether you are right or not with your guesses.
- Decide who is allocated to your what and when.
- Re-plan after short intervals, based on new knowledge and any divergences from previous guesses.
20% or fewer of the points at issue will comprise over 80% of the disputed territory’s value. Despite this, people tend to aim to win as many points in a negotiation setting as possible. This approach means they are also focusing on unimportant points and are unwilling to concede them during the closing stages of negotiation. Therefore, you should concede the unimportant points of negotiation during the closing stages. Only do this in exchange for an acceptable quantity of essential points. The latter stages of negotiation are the most important. Again, Koch points out that 80% of the concessions will occur in the last 20% of the time available. Subsequently, make your most important requests near the end rather than the beginning of a negotiation.
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