Book Summary: The 80/20 Principle – The Secret to Achieving More with Less

In the following summary, you’ll learn how to identify and multiply the vital 20% that produces 80% of your happiness and success.

“80/20 thinking requires us to spot the few really important things that are happening and ignore the mass of unimportant things.” – Richard Koch

“About a fifth of your time is likely to give you four‐fifths of your achievement or results and four‐fifths of your happiness.” – Richard Koch

Most people are too busy to pause and consider the 20% of their time that yields 80% of their results and happiness. But if you learn to pause to consider the 20% of your time and activity that yields 80% of your happiness and success, you can double your time doing those activities and experience 160% of the happiness and success you enjoy today.

Recommendation

The key to success is “productive laziness,” claims author Richard Koch. Hard work is an inefficient path to accomplishment because of the “80/20 Principle.” You achieve about 80% of your results with about 20% of your activities; the rest is wasted effort. Focus on the productive 20% in order to work less and achieve more. Koch concisely explains the concept on his first few pages, so the book can seem repetitive, but the main lesson is clear. If you want to raise profit margins, focus on the most profitable 20% of your products. If you want to be happier, focus on the 20% of your activities that satisfy you most. Koch includes many useful ancillary ideas, such as a step-by-step guide to analyzing your business’s profit centers and a contrarian take on time management. We recommend his approach to the self-employed, to workers at all levels who want to better leverage their time and effort, and to companies seeking to maximize their marketing efforts. As Koch says, “Even if you are hard-working, you can learn to become lazy.”

Take-Aways

• You achieve 80% of your results with 20% of your work. That’s the “80/20 rule.”
• Focus on the 20% of products and customers that produces 80% of your profits.
• Reward the minority of employees who produce the most value.
• Improve the performance of the other 80% of products, customers or employees – or get rid of them.
• Most businesses are ineffective at switching resources from weak to strong areas.
• Analyze your business by comparing each segment that faces a different competitor.
• Revise your approach to time management. Don’t try to get more things done; try to get the important things done.
• Your most-productive activities are usually the ones you most enjoy.
• It’s easier to maximize your 20% if you work for yourself.
• Define the characteristics of your “happiness islands” of time – that is, when you are most productive.

Identify your 20%

When you do a 20% activity, you get more energy out of it than you put into it. With this characteristic in mind, let’s explore your past, present, and future for experiences that produce a net energy increase. Take out a blank piece of paper and create three columns with the headers “Past”, Present”, and “Future”.

In the “Past” column, write down anything that comes to mind when you think back to:

• Projects you’re proud of. When you invest time and energy in hard but rewarding projects like the past projects you’re proud of, you boost your overall sense of achievement and fulfillment.
• People you’ve learned the most from. Of all the podcasts I’ve listened to, roughly 80% of my insights have come from just two podcasts, The Tim Ferriss Show and The Huberman Lab.
• People you’ve enjoyed talking to. You may consider a friend from college who you could talk with for hours but have lost touch with. Putting in effort to renew that friendship and restart those great conversations will yield huge happiness returns.
• Enduring interests. I’ve loved reading personal development books and business books since I was a teenager, so I knew it was a safe place to invest my time and effort and to build a YouTube channel around that interest.
• Things you enjoyed more and were better at than you expected. If you enjoyed a public speaking course and were better than 80% of your class, giving more presentations at work could pay off in a big way.

In the “Present” column, write down anything that comes to mind, when you think of:

• Work that sustains you. What tasks do you find hard to stop once you get started? What projects do you most look forward to working on again tomorrow?
• People you enjoy being around most. Who do you trust, respect, and have a lot in common with?
• Exercises you regularly do. What exercise makes you feel the best afterward?
• Food you regularly eat. Of all the foods you consume, which do you enjoy and makes you feel good afterward?

In the “Future” column, write down anything that comes to mind when you think of:

• Events you’re most looking forward to. This might include a game night with friends, a local competition for your favorite hobby, a conference, a sporting event, or time off work next month to work on a passion project. After each event, determine if it was better than you expected. Replicating better‐than‐expected events is a sure way to add 20% activities to your life.

Double your 20%

Now that you have a list of 20% activities, double your time doing those activities to experience 160% of the happiness and success you experience today by stealing time away from 80% activities. An 80% activity yields less reward than the effort you put in. There are two categories of activity where you can find an abundance of 80% activities:

Things people ask you to do (reward < effort):

When someone asks you to attend an event or meeting you’re not excited about or needs help with something you’re not thrilled about doing – like moving, finishing a project, or volunteering for a cause you don’t care about, tell them “Sorry, I need to make time for [insert a 20% activity]” or agree to help in a different way that dramatically shortens the time with which you can help.

Things people could easily do for you (reward < effort):

As you do tasks at home and at work that you don’t enjoy, ponder the question: “Could 80% of this task be easily and cheaply done by someone else?” There are services for hire for just about every mundane thing you do ‐ house cleaning, lawn care, document editing, data entry, making meeting minutes, doing research, grocery shopping, etc. If you’re hesitant about giving something to someone else because it’s too expensive or they might screw it up, remember that whatever time you free up, you quadruple the value of that time (since you will be investing that time in 20% activities). And you don’t need to give an entire task away – just give away 80% and do the critical 20% (parts that require your judgement) yourself.

Summary

Less Is More

In the early 20th century, economic philosopher Vilfredo Pareto uncovered a powerful secret hidden in economic statistics: Cause and effect are not in balance. A minority of causes – usually around 20% – produces 80% of results. The pattern he discerned, now known as “the Pareto Law,” occurs in every area of business: A fifth of your customers accounts for four-fifths of your “dollar sales value.” And a few superstar employees, say 20%, are responsible for the majority of your firm’s productivity and value. The “80/20 Principle” proves pervasive outside of business, as well. Twenty percent of drivers are responsible for 80% of car accidents. And 20% of criminals commit 80% of crimes.

“The winners in any field have…found ways to make 20% of effort yield 80% of results.”

Take advantage of this principle to improve your company’s performance and your personal effectiveness and happiness. Focus on your most-productive actions and multiply their effects, rather than wasting time and money on unproductive activities. You’ll create more value with less effort.

Patterns of the 80/20 Principle

To exploit the 80/20 Principle fully, identify your most-productive actions and resources by using. two complementary techniques: “80/20 Analysis” and “80/20 Thinking.”

“The 80/20 Principle…should be used by every intelligent person in their daily life, by every organization, and by every social grouping and form of society.”

Make an 80/20 Analysis by gathering data that enable you to measure your ratio of input to output more precisely. Compile sales statistics on various product groups or chart certain customers’ spending. Most likely, you’ll find that specific groups of customers and products produce more than their share of value. Act on these findings two ways:

1. Magnify the contributions of the 20% – Focus your sales efforts on the most profitable 20% of your products. Or, strive to keep your top 20% of customers happy instead of diluting your efforts by treating all your customers equally.
2. Improve the less valuable 80% – Cut costs or raise prices on underperforming products. Introduce products with wider appeal or target sales to underserved customer groups. For instance, women account for most of the sales in shopping malls. Reach more men by installing stores targeted to them. Trying to improve the lagging 80% is more difficult, less efficient and generally provides smaller returns than concentrating on the 20%.

“The 80/20 Principle asserts that a minority of causes, inputs or effort usually leads to a majority of the results, outputs or rewards.”

Sometimes you don’t have time to gather data because you have to make a decision right away. And sometimes you don’t have measurable data. For example, how do you quantify the happiness you derive from your hobbies or friends? In such situations, the 80/20 Thinking approach proves useful; it resembles the 80/20 Analysis, except that you estimate ratios rather than measure them. Using estimates or intuition can lead to error, but you are on more certain ground with 80/20 Thinking than with conventional thinking where you consider averages, not ratios. As a result, you’re more likely to overlook the fact that some variables matter more than others.

Cultivate Your Most-Profitable Segments

Use the 80/20 Principle to improve your firm’s profitability. First, compile an accurate picture of where your company is making and losing money. Inspecting overall sales averages won’t help. Instead, compare the profitability of individual product lines or, even better, the profitability of your company’s “competitive segments” – the portions of your business that face different competitors. In most firms, 20% of these segments will bring in 80% of the profits. The other 80% will consist of less-profitable segments and possibly some losers.

“Successful marketing is all about a focus on the…small number of customers who are the most active in consuming your product or service.”

Make the most-profitable segments your top priority. Redeploy management and sales staff from lower-performing areas to the 20% segments. Strive to sell more to your existing customers in that segment and to attract new customers. Because your margins are high in this area, you may boost your competitive position by cutting prices or offering more services.

“A firm that finds that 80% of its profits come from 20% of its customers should…concentrate on keeping that 20% happy and increasing the business carried out with them.”

Don’t be too “linear” about this approach. Take a tip from chaos science, and remember that the connection between cause and effect is not always a straight line. The data you’re looking at are like a “freeze frame”: one moment in an ongoing process. As a result, an “obvious” solution – such as jettisoning a money-losing segment – may be no solution at all. Analyze that segment, and discern why it’s losing money. A poorly performing segment might be garnering substantial revenues. It might look bad on paper but still be productive. It might be a new division whose start-up costs consume its profits. If it serves an attractive market, this segment could eventually turn into a winner.

Nurture Your Best Customers

Apply the 80/20 Principle to your customer relations. You earn most of your profits by selling to a small group of your top customers, so focus your efforts on them. Figure out how to sell them more. Lavish so much attention on them that they become customers for life. These four steps help you “lock in” your best customers:

1. Find your top 20% consumers – Before you can give something extra to your best clients or “channels of distribution,” you have to identify them.
2. Provide “outrageous service” – Don’t just meet their needs; exceed their expectations and astonish them. You can’t afford to give this kind of TLC to all your customers, so reserve it for your best.
3. Innovate for your best customers – The most efficient way to gain market share is to sell more to current customers. Anticipate their needs, and design new products and services specifically for them. Involve them in product development.
4. Win their loyalty – Long-term customers drive profitability. Efforts to keep them may increase costs in the short term, but will boost long-term profits.

Reward Your Best Employees

Apply the principle to your members of staff. In most organizations, 20% of employees produce 80% of the value. You’ll notice this most clearly in your sales force because their performance is the easiest to measure. Make the most of your top representatives with the following strategies:

• Hold on to them – Keep your superstar employees happy. Reward them in proportion to their contribution, and reserve training for those who can make best use of it.
• Analyze their success – Identify the traits and techniques that make these people successful. Examine their training and processes. Hire more people with those traits and get everyone else to adopt their techniques.
• Switch teams around – Let a top team take over a lagging segment, and put an average team in a high-volume segment. If the top team flounders, it could be a sign of structural problems in the segment.
• Analyze winning streaks – The top 20% of salespeople generate most of their sales in 20% of their time. Figure out what they did differently during these “lucky streaks” and amplify it.

Individual 80/20

The pursuit of happiness is a quest for the top 20% of factors that add to your contentment. Twenty percent of your personal relationships are the most fulfilling; 20% of your leisure activities are the most fun and satisfying; and 20% of your time is the most productive. To work less, accomplish more and have more fun doing it, unleash the power of the 80/20 Principle in your personal life.

“Business organizations and individuals are generally…poor at…shifting resources from where they have weak results to where they have powerful results.”

To achieve these benefits, consider your life with care. This level of 80/20 Thinking should be:

• “Reflective” – Slow down. Take the time to figure out what’s most important to you and to seek out the small variables that produce the greatest impacts.
• “Unconventional” – Ordinary thought patterns lead you to waste time on unimportant issues and efforts. Thinking eccentrically is the first step away from obviousness.
• “Hedonistic” – Keep an eye out for things you enjoy. Success flows from your satisfaction and the pleasure you get from your work.
• “Optimistic” – As you examine areas of your life that are unsatisfying, believe you can change things for the better.
• “Relaxed” – Conventional thinking sees achievement as the fruit of hard work and sacrifice. Don’t fall into the trap of being pointlessly busy. Stay relaxed, take your time and focus on the “vital few” causes.

“80/20 Thinking requires, and with practice enables, us to spot the few really important things that are happening and [to] ignore the mass of unimportant things.”

Start your reflection with a simple exercise. List your “achievement islands.” These are the brief periods when you accomplished more than you usually do. Identify what made these periods so productive. Usually you’ll find that you were doing things you enjoy that contribute meaning to your life. On a separate page, list your “achievement desert islands,” the dry spells when you may have been busy but you felt like you were spinning your wheels. Why did you feel that way? Typical reasons include doing things you don’t want to do and doing things the way they’ve always been done.

“Find your niche. It may take you a long time, but it is the only way you will gain access to exceptional returns.”

Expand this exercise to cover more of your life by identifying your “happiness islands” – the times you were happiest in your life – and your “unhappiness islands” – the periods when you were miserable or neutral.

When you finish your lists, reflect on how to multiply the 20% batches of achievement and happiness. It’s not as simple as copying your most-effective activities or recreating the circumstances of your peaks of happiness and achievement. These exercises aim to boost satisfaction and effectiveness by revealing what you like to do. Analyzing the most appealing portions of your job could even point to a new career that involves more of that kind of task.

Time and the 80/20 Principle

A common complaint about modern life is that no one has enough time to get everything done. A whole time-management industry has sprung up to help people cram more activities into the day. This premise assumes that time is scarce and you must embrace speed to manage this insufficient resource. The 80/20 Principle turns this idea on its head because it recognizes that only 20% of your actions lead to 80% of your accomplishment. If only a fifth of your time is productive, there can hardly be a shortage of it. Utilize these tactics to get more out of your time:

• Embrace “productive laziness” – Spend less time doing busy work and more time analyzing situations and identifying your most-productive steps.
• Have fun – To ensure that you spend your time in a valuable way focus on doing things you enjoy, which are usually things you’re good at. Such tasks produce greater returns than chores you find tedious. Most self-made tycoons built their wealth by doing things they liked to do, so seek a way to turn your pleasures into your job.
• Own your time – Much of the unproductive 80% of your time may go toward work you do at the behest of other people. If you can’t be self-employed, approach your tasks with the mind-set of an independent contractor. Don’t try to eliminate all your obligations, but choose each obligation wisely. “What we must do is to plant firmly in our minds that hard work, especially for somebody else, is not an efficient way to achieve what we want.”
• Use time eccentrically – The conventional view of time – that you have to fill it with activity – is the main contributor to the wasteful 80% of your activities. You are more likely to use time productively if you use it unconventionally. British Prime Minister William Gladstone, a Victorian politician, derived much of his effectiveness from a highly unusual use of his time. Instead of burying himself in political responsibilities, he took time to travel, attend the theater, read widely and socialize.

“Most things always appear more important than the few things that are actually more important.”

Cull your unproductive activities and concentrate on the productive ones. Set a goal of increasing your productive time to 40%, twice the normal amount. Following that rubric, you theoretically could work only two days a week and accomplish more than you do now.

About the author

Richard Koch is an investor and author. He worked as a consultant at The Boston Consulting Group and Bain & Company, and co-founded The LEK Partnership, a strategy consultancy.

Richard Koch | Email

Genres

Business, Self Help, Productivity, Personal Development, Psychology, Management, Leadership, Entrepreneurship, Job Hunting and Careers, Time Management, Success Self-Help

Table of Contents

Preface to the Second Edition xi
Acknowledgments xv

PART ONE: OVERTURE
1 Welcome to the 80/20 Principle 3
2 How to Think 80/20 21

PART TWO: CORPORATE SUCCESS NEEDN’T BE A MYSTERY
3 The Underground Cult 43
4 Why Your Strategy Is Wrong 58
5 Simple Is Beautiful 83
6 Hooking the Right Customers 100
7 The Top 10 Business Uses of the 80/20 Principle 115
8 The Vital Few Give Success to You 127

PART THREE: WORK LESS, EARN AND ENJOY MORE
9 Being Free 137
10 Time Revolution 147
11 You Can Always Get What You Want 166
12 With a Little Help from Our Friends 177
13 Intelligent and Lazy 189
14 Money, Money, Money 207
15 The Seven Habits of Happiness 220

PART FOUR: FRESH INSIGHTS-THE PRINCIPLE REVISITED
16 The Two Dimensions of the Principle 239

Notes and References 257
Index 267

Overview

Be more effective with less effort by learning how to identify and leverage the 80/20 principle: that 80 percent of all our results in business and in life stem from a mere 20 percent of our efforts.

The 80/20 principle is one of the great secrets of highly effective people and organizations.

Did you know, for example, that 20 percent of customers account for 80 percent of revenues? That 20 percent of our time accounts for 80 percent of the work we accomplish? The 80/20 Principle shows how we can achieve much more with much less effort, time, and resources, simply by identifying and focusing our efforts on the 20 percent that really counts. Although the 80/20 principle has long influenced today’s business world, author Richard Koch reveals how the principle works and shows how we can use it in a systematic and practical way to vastly increase our effectiveness, and improve our careers and our companies.

The unspoken corollary to the 80/20 principle is that little of what we spend our time on actually counts. But by concentrating on those things that do, we can unlock the enormous potential of the magic 20 percent, and transform our effectiveness in our jobs, our careers, our businesses, and our lives.

Review/Endorsements/Praise/Award

“The 80/20 Principle is the cornerstone of results-based living. Read this book and use it.” – Tim Ferriss, author of The 4-Hour Workweek

“Time management is not about organising your daily tasks, it is about organising your essential daily tasks, and dumping the rest. Koch has made millions from this – a bestseller based on just one idea – proving that it works.” – GQ’s 25 Best Business Books

“Congratulations! The 80/20 Principle is terrific.” – Al Ries, bestselling author of Focus and Positioning.

“There are ideas in here that could change your life.” – The Good Book Guide

“Koch is a passionate 80/20er. Read this and you will be too.” – Andrew Campbell, Ashridge Strategic Management Centre

“Both astute and entertaining, this is an intriguing book to help people concentrate on not wasting their lives.” – Professor Theodore Zeldin, St Antony’s College, Oxford.

“We give this Dali-esque masterwork 5 stars… a beautiful collage of well-written prose… the book is worth many times its price.” – The Weston Review, Tampa Bay, Florida

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Introduction: Welcome to the 80/20 Principle

For a very long time, the Pareto law [the 80/20 Principle] has lumbered the economic scene like an erratic block on the landscape; an empirical law which nobody can explain.
–Josef Steindl

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. It can help individuals and groups achieve much more, with much less effort. The 80/20 Principle can raise personal effectiveness and happiness. It can multiply the profitability of corporations and the effectiveness of any organization. It even holds the key to raising the quality and quantity of public services while cutting their cost. This book, the first ever on the 80/20 Principle, is written from a burning conviction, validated in personal and business experience, that this principle is one of the best ways of dealing with and transcending the pressures of modern life.

What is the 80/20 Principle?

The 80/20 Principle asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards. Taken literally, this means that, for example, 80 percent of what you achieve in your job comes from 20 percent of the time spent. Thus for all practical purposes, four-fifths of the effort–a dominant part of it–is largely irrelevant. This is contrary to what people normally expect.

So the 80/20 Principle states that there is an inbuilt imbalance between causes and results, inputs and outputs, and effort and reward. A good benchmark for this imbalance is provided by the 80/20 relationship: a typical pattern will show that 80 percent of outputs result from 20 percent of inputs; that 80 percent of consequences flow from 20 percent of causes; or that 80 percent of results come from 20 percent of effort.

In business, many examples of the 80/20 Principle have been validated. Twenty percent of products usually account for about 80 percent of dollar sales value; so do 20 percent of customers. Twenty percent of products or customers usually also account for about 80 percent of an organization’s profits.

In society, 20 percent of criminals account for 80 percent of the value of all crime. Twenty percent of motorists cause 80 percent of accidents. Twenty percent of those who marry comprise 80 percent of the divorce statistics (those who consistently remarry and redivorce distort the statistics and give a lopsidedly pessimistic impression of the extent of marital fidelity). Twenty percent of children attain 80 percent of educational qualifications available.

In the home, 20 percent of your carpets are likely to get 80 percent of the wear. Twenty percent of your clothes will be worn 80 percent of the time. And if you have an intruder alarm, 80 percent of the false alarms will be set off by 20 percent of the possible causes.

The internal combustion engine is a great tribute to the 80/20 Principle. Eighty percent of the energy is wasted in combustion and only 20 percent gets to the wheels; this 20 percent of the input generates 100 percent of the output!

Pareto’s discovery: systematic and predictable lack of balance

The pattern underlying the 80/20 Principle was discovered in 1897, about 100 years ago, by Italian economist Vilfredo Pareto (1848-1923). His discovery has since been called many names, including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort, and the Principle of Imbalance; throughout this book we will call it the 80/20 Principle. By a subterranean process of influence on many important achievers, especially business people, computer enthusiasts and quality engineers, the 80/20 Principle has helped to shape the modern world. Yet it has remained one of the great secrets of our time–and even the select band of cognoscenti who know and use the 80/20 Principle only exploit a tiny proportion of its power.

So what did Vilfredo Pareto discover? He happened to be looking at patterns of wealth and income in nineteenth-century England. He found that most income and wealth went to a minority of the people in his samples. Perhaps there was nothing very surprising in this. But he also discovered two other facts that he thought highly significant. One was that there was a consistent mathematical relationship between the proportion of people (as a percentage of the total relevant population) and the amount of income or wealth that this group enjoyed. To simplify, if 20 percent of the population enjoyed 80 percent of the wealth, then you could reliably predict that 10 percent would have, say, 65 percent of the wealth, and 5 percent would have 50 percent. The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced.

Pareto’s other finding, one that really excited him, was that this pattern of imbalance was repeated consistently whenever he looked at data referring to different time periods or different countries. Whether he looked at England in earlier times, or whatever data were available from other countries in his own time or earlier, he found the same pattern repeating itself, over and over again, with mathematical precision.

Was this a freak coincidence, or something that had great importance for economics and society? Would it work if applied to sets of data relating to things other than wealth or income? Pareto was a terrific innovator, because before him no one had looked at two related sets of data–in this case, the distribution of incomes or wealth, compared to the number of income earners or property owners–and compared percentages between the two sets of data. (Nowadays this method is commonplace and has led to major breakthroughs in business and economics.)

Sadly, although Pareto realized the importance and wide range of his discovery, he was very bad at explaining it. He moved on to a series of fascinating but rambling sociological theories, centering on the role of elites, which were hijacked at the end of his life by Mussolini’s fascists. The significance of the 80/20 Principle lay dormant for a generation. While a few economists, especially in the US, realized its importance, it was not until after the Second World War that two parallel yet completely different pioneers began to make waves with the 80/20 Principle.

1949: Zipf’s Principle of Least Effort

One of these pioneers was the Harvard professor of philology, George K. Zipf. In 1949 Zipf discovered the “Principle of Least Effort,” which was actually a rediscovery and elaboration of Pareto’s principle. Zipf’s principle said that resources (people, goods, time, skills, or anything else that is productive) tended to arrange themselves so as to minimize work, so that approximately 20-30 per cent of any resource accounted for 70-80 per cent of the activity related to that resource.

Professor Zipf used population statistics, books, philology, and industrial behavior to show the consistent recurrence of this unbalanced pattern. For example, he analyzed all the Philadelphia marriage licenses granted in 1931 in a 20-block area, demonstrating that 70 percent of the marriages occurred between people who lived within 30 percent of the distance.

Incidentally, Zipf also provided a scientific justification for the messy desk by justifying clutter with another law: frequency of use draws near to us things that are frequently used. Intelligent secretaries have long known that files in frequent use should not be filed!

1951: Juran’s Rule of the Vital Few and the rise of Japan

The other pioneer of the 80/20 Principle was the great quality guru, Romanian-born U.S. engineer Joseph Moses Juran (born 1904), the man behind the Quality Revolution of 1950-90. He made what he alternately called the “Pareto Principle” and the “Rule of the Vital Few” virtually synonymous with the search for high product quality.

In 1924, Juran joined Western Electric, the manufacturing division of Bell Telephone System, starting as a corporate industrial engineer and later setting up as one of the world’s first quality consultants.

His great idea was to use the 80/20 Principle, together with other statistical methods, to root out quality faults and improve the reliability and value of industrial and consumer goods. Juran’s path-breaking Quality Control Handbook was first published in 1951 and extolled the 80/20 Principle in very broad terms: The economist Pareto found that wealth was nonuniformly distributed in the same way [as Juran’s observations about quality losses]. Many other instances can be found–the distribution of crime amongst criminals, the distribution of accidents among hazardous processes, etc. Pareto’s principle of unequal distribution applied to distribution of wealth and to distribution of quality losses.

No major U.S. industrialist was interested in Juran’s theories. In 1953 he was invited to Japan to lecture, and met a receptive audience. He stayed on to work with several Japanese corporations, transforming the value and quality of their consumer goods. It was only once the Japanese threat to U.S. industry had become apparent, after 1970, that Juran was taken seriously in the West. He moved back to do for U.S. industry what he had done for the Japanese. The 80/20 Principle was at the heart of this global quality revolution.

From the 1960s to the 1990s: progress from using the 80/20 Principle

IBM was one of the earliest and most successful corporations to spot and use the 80/20 Principle, which helps to explain why most computer systems specialists trained in the 1960s and 1970s are familiar with the idea.

In 1963, IBM discovered that about 80 percent of a computer’s time is spent executing about 20 percent of the operating code. The company immediately rewrote its operating software to make the most-used 20 percent very accessible and user friendly, thus making IBM computers more efficient and faster than competitors’ machines for the majority of applications.

Those who developed the personal computer and its software in the next generation, such as Apple, Lotus, and Microsoft, applied the 80/20 Principle with even more gusto to make their machines cheaper and easier to use for a new generation of customers, including the now celebrated “dummies” who would previously have given computers a very wide berth.

Winner take all

A century after Pareto, the implications of the 80/20 Principle have surfaced in a recent controversy over the astronomic and ever-rising incomes going to superstars and those very few people at the top of a growing number of professions. Film director Steven Spielberg earned $165 million in 1994. Joseph Jamial, the most highly paid trial lawyer, was paid $90 million. Merely competent film directors or lawyers, of course, earn a tiny fraction of these sums.

The twentieth century has seen massive efforts to level incomes, but inequality, removed in one sphere, keeps popping up in another. In the United States from 1973 to 1995, average real incomes rose by 36 percent, yet the comparable figure for nonsupervisory workers fell by 14 percent. During the 1980s, all of the gains went to the top 20 percent of earners, and a mind-boggling 64 percent of the total increase went to the top 1 percent! The ownership of shares in the United States is also heavily concentrated within a small minority of households: 5 percent of U.S. households own about 75 percent of the household sector’s equity. A similar effect may be seen in the role of the dollar: almost 50 percent of world trade is invoiced in dollars, far above America’s 13 percent share of world exports. And, while the dollar’s share of foreign exchange reserves is 64 percent, the ratio of American GDP to global output is just over 20 percent. The 80/20 Principle will always reassert itself, unless conscious, consistent, and massive efforts are made and sustained to overcome it.

Why the 80/20 Principle is so Important

The reason that the 80/20 Principle is so valuable is that it is counter-intuitive. We tend to expect that all causes will have roughly the same significance. That all customers are equally valuable. That every bit of business, every product, and every dollar of sales revenue is as good as any other. That all employees in a particular category have roughly equivalent value. That each day or week or year we spend has the same significance. That all our friends have roughly equal value to us. That all inquiries or phone calls should be treated in the same way. That one university is as good as another. That all problems have a large number of causes, so that it is not worth isolating a few key causes. That all opportunities are of roughly equal value, so that we treat them all equally.

We tend to assume that 50 percent of causes or inputs will account for 50 percent of results or outputs. There seems to be a natural, almost democratic, expectation that causes and results are generally equally balanced. And, of course, sometimes they are. But this “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps. 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. The imbalance may be 65/35, 70/30, 75/25, 80/20, 95/5, or 99.9/0.1, or any set of numbers in between. However, the two numbers in the comparison don’t have to add up to 100.

The 80/20 Principle also asserts that when we know the true relationship, we are likely to be surprised at how unbalanced it is. Whatever the actual level of imbalance, it is likely to exceed our prior estimate. Executives may suspect that some customers and some products are more profitable than others, but when the extent of the difference is proved, they are likely to be surprised and sometimes dumbfounded. Teachers may know that the majority of their disciplinary troubles or most truancy arises from a minority of pupils, but if records are analyzed the extent of the imbalance will probably be larger than expected. We may feel that some of our time is more valuable than the rest, but if we measure inputs and outputs the disparity can still stun us.

Why should you care about the 80/20 Principle? Whether you realize it or not, the principle applies to your life, to your social world, and to the place where you work. Understanding the 80/20 Principle gives you great insight into what is really happening in the world around you.

The overriding message of this book is that our daily lives can be greatly improved by using the 80/20 Principle. Each individual can be more effective and happier. Each profit-seeking corporation can become very much more profitable. Each nonprofit organization can also deliver much more useful outputs. Every government can ensure that its citizens benefit much more from its existence. For everyone and every institution, it is possible to obtain much more that is of value and avoid what has negative value, with much less input of effort, expense, or investment.

At the heart of this progress is a process of substitution. Resources that have weak effects in any particular use are not used, or are used sparingly. Resources that have powerful effects are used as much as possible. Every resource is ideally used where it has the greatest value. Wherever possible, weak resources are developed so that they can mimic the behavior of the stronger resources.

Business and markets have used this process, to great effect, for hundreds of years. The French economist J-B Say coined the word “entrepreneur” around 1800, saying that “the entrepreneur shifts economic resources out of an area of lower productivity into an area of higher productivity and yield.” But one fascinating implication of the 80/20 Principle is how far businesses and markets still are from producing optimal solutions. For example, the 80/20 Principle asserts that 20 percent of products, or customers or employees, are really responsible for about 80 percent of profits. If this is true–and detailed investigations usually confirm that some such very unbalanced pattern exists–the state of affairs implied is very far from being efficient or optimal. The implication is that 80 percent of products, or customers or employees, are only contributing 20 percent of profits; that there is great waste; that the most powerful resources of the company are being held back by a majority of much less effective resources; that profits could be multiplied if more of the best sort of products could be sold, employees hired, or customers attracted (or convinced to buy more from the firm).

In this kind of situation one might well ask: why continue to make the 80 percent of products that only generate 20 percent of profits? Companies rarely ask these questions, perhaps because to answer them would mean very radical action: to stop doing four-fifths of what you are doing is not a trivial change.

What J-B Say called the work of entrepreneurs, modern financiers call arbitrage. International financial markets are very quick to correct anomalies in valuation, for example between exchange rates. But business organizations and individuals are generally very poor at this sort of entrepreneurship or arbitrage, at shifting resources from where they have weak results to where they have powerful results, or at cutting off low-value resources and buying more high-value resources. Most of the time, we do not realize the extent to which some resources, but only a small minority, are superproductive–what Joseph Juran called the “vital few”–while the majority–the “trivial many”–exhibit little productivity or else actually have negative value. If we did realize the difference between the vital few and the trivial many in all aspects of our lives and if we did something about it, we could multiply anything that we valued.

The 80/20 Principle and Chaos Theory

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 the 80/20 Principle and helps to explain it.

The last third of the twentieth century has seen a revolution in the way that scientists think about the universe, overturning the prevailing wisdom of the past 350 years. That prevailing wisdom was a machine-based and rational view, which itself was a great advance on the mystical and random view of the world held in the Middle Ages. The machine-based view converted God from being an irrational and unpredictable force into a more user-friendly clockmaker-engineer.

The view of the world held from the seventeenth century and still prevalent today, except in advanced scientific circles, was immensely comforting and useful. All phenomena were reduced to regular, predictable, linear relationships. For example, a causes b, b causes c, and a+c cause d. This worldview enabled any individual part of the universe–the operation of the human heart, for example, or of any individual market–to be analyzed separately, because the whole was the sum of the parts and vice versa.

But in the second half of the twentieth century it seems much more accurate to view the world as an evolving organism where the whole system is more than the sum of its parts, and where relationships between the parts are nonlinear. Causes are difficult to pin down, there are complex interdependencies between causes, and causes and effects are blurred. The snag with linear thinking is that it doesn’t always work, it is an oversimplification of reality. Equilibrium is illusory or fleeting. The universe is wonky.

Yet chaos theory, despite its name, does not say that everything is a hopeless and incomprehensible mess. Rather, there is a self-organizing logic lurking behind the disorder, a predictable nonlinearity–something which economist Paul Krugman has called “spooky,” “eerie,” and “terrifyingly exact.” The logic is more difficult to describe than to detect and is not totally dissimilar to the recurrence of a theme in a piece of music. Certain characteristic patterns recur, but with infinite and unpredictable variety.

Why the 80/20 Principle Brings Good News

I want to end this introduction on a personal rather than a procedural note. I believe that the 80/20 Principle is enormously hopeful. Certainly, the principle brings home what may be evident anyway: that there is a tragic amount of waste everywhere, in the way that nature operates, in business, in society, and in our own lives. If the typical pattern is for 80 percent of results to come from 20 percent of inputs, it is necessarily typical too that 80 percent, the great majority, of inputs are having only a marginal–20 percent–impact.

The paradox is that such waste can be wonderful news, if we can use the 80/20 Principle creatively, not just to identify and castigate low productivity but to do something positive about it. There is enormous scope for improvement, by rearranging and redirecting both nature and our own lives. Improving on nature, refusing to accept the status quo, is the route of all progress: evolutionary, scientific, social, and personal. George Bernard Shaw put it well: “The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”

The implication of the 80/20 Principle is that output can be not just increased but multiplied, if we can make the low-productivity inputs nearly as productive as the high-productivity inputs. Successful experiments with the 80/20 Principle in the business arena suggest that, with creativity and determination, this leap in value can usually be made.

There are two routes to achieving this. One is to reallocate the resources from unproductive to productive uses, the secret of all entrepreneurs down the ages. Find a round hole for a round peg, a square hole for a square peg, and a perfect fit for any shape in between. Experience suggests that every resource has its ideal arena, where the resource can be tens or hundreds of times more effective than in most other arenas.

The other route to progress–the method of scientists, doctors, preachers, computer systems designers, educationalists, and trainers–is to find ways to make the unproductive resources more effective, even in their existing applications; to make the weak resources behave as though they were their more productive cousins; to mimic, if necessary by intricate rote-learning procedures, the highly productive resources.

The few things that work fantastically well should be identified, cultivated, nurtured, and multiplied. At the same time, the waste–the majority of things that will always prove to be of low value to man and beast–should be abandoned or severely cut back.

As I have been writing this book and observed thousands of examples of the 80/20 Principle, I have had my faith reinforced: faith in progress, in great leaps forward, and in mankind’s ability, individually and collectively, to improve the hand that nature has dealt. Joseph Ford comments: “God plays dice with the universe. But they’re loaded dice. And the main objective is to find out by what rules they were loaded and how we can use them for our own ends.”

The 80/20 Principle can help us achieve precisely that.