Leadership and Change with 80/20
When people ask, "What do you do?" at a cocktail party, I brace myself. The moment “80/20" or "consultant” rolls off my tongue, I await to hear one of several myths about 80/20…or truths about consultants. After the requisite consultant jokes, 80% of the time (naturally), they reply “We do 80/20” as if knowing the 80/20 principle equates to its execution—which is like saying you’re a mathematician because you memorized the Pythagorean theorem. While the rest of the party is digging into the hors d’oeuvres, I find myself debunking some pervasive 80/20 myths.
There is a lot of misunderstanding out there about 80/20. The core definition of the 80/20 rule—also known as the Pareto principle—is that “roughly 80% of outcomes come from 20% of causes.” But what does this really look like when used by a business? And how do common myths about the 80/20 rule line up with what it can actually do for a company’s profits?
Here are the most common myths about 80/20 as a business methodology, and why 80/20 won’t work for anyone who believes them.
Myth 1: It’s all about cutting products and getting rid of people.
One of the most common things I hear about 80/20 is, “We thought about 80/20, but we didn’t want to cut products, fire customers or lay off people.”
The reality is that 80/20 is ALL about profitable growth. The reason you cut is that underperforming customers, products and people steal profits. 80/20 analysis typically shows companies where they are making their profit and where they are losing money. Typically, the top 20% of customers produce more than 150% of profits. The myth is that all you need to do is cut unprofitable customers or products. Real 80/20 requires a company to either remove the resources needed to serve that which is cut or to reallocate those resources and focus them on the right type of growth.
Further, you can’t just hack customers or products—you must dive deeper into data. Please don’t cut products without regard for which customers are buying. Your top account might be buying a low-margin product—there is a great risk to the business if you cut that! Furthermore, there are many ways to simplify the product line, and eliminating the product is only one of those ways.
Simplifying the business is step one. Growth comes next, and it’s where businesses yield the best results.
Myth 2: You can complete 80/20.
If you find yourself saying, “My company did 80/20 a few years ago, it was great,” then you’ve not fully realized 80/20. That’s like saying, “We did democracy a few years ago, it was great.” 80/20 is a perpetual strategy that becomes ingrained in a company’s culture.
In my experience, winning 80/20 companies continue to focus on the most important customers, products, processes, employees, and core competencies—at the deliberate expense of the rest. As companies grow, they must be willing to change, evolve, adapt and continue to reinvent themselves. Once learned, 80/20 also becomes an effective way to evaluate and integrate acquisitions. You can master 80/20, but only if you understand it is an ever-evolving process and not a one-time project.
Myth 3: You’re too busy for 80/20.
If you think you don’t have time for 80/20, you may need it even more. 80/20 doesn’t take time—it makes time. It eliminates the noise so you can focus time and resources on the things that truly matter. 80/20 is not another initiative—it is how to get initiatives done faster, with more impact. When you look at strategic initiatives through the 80/20 lens, you will see what you need to do and what you don’t. With 80/20 focus, everything will be faster and more impactful.
That said, if you’re not doing “real” 80/20, you may indeed have too many initiatives, with few being done well. You don’t have to be working as hard as you are—you need to do less across the board, not more.
If you think don’t have time for 80/20, you probably need 80/20.
Myth 4: You must choose between 80/20 and other strategies.
Different strategies and operating models integrate beautifully with 80/20, including the Danaher Business System (DBS), Lean Six Sigma and even most companies’ proprietary systems. For example, Lean principles state that simplification is the first step of Lean. Since 80/20 focuses on simplifying processes, using this method first can complement Lean principles. In my experience, with few exceptions, 80/20 doesn’t displace an existing strategy—it enhances it.
Myth 5: 80/20 is not applicable to profitable companies.
When people say they don’t need 80/20 because they are already profitable, it’s like saying they don’t need to eat right and exercise because they have a healthy BMI. Bad habits will catch up to a person. Complexity and inefficiency will eventually rear their ugly heads on a company’s P&L.
Taking a profitable company through the process of 80/20 is very impactful. In fact, I recommend companies begin their 80/20 journey when things are going well because they won’t be distracted by sheer survival.
80/20 companies have more resources to focus on gaining market share than their competitors. They are able crush their competition with the accounts that drive profits. In short, 80/20 gives you the ability to scale, focus on innovation, and win new, large accounts. When companies adopt 80/20, they will grow revenue on the topline, drop profits to the bottom line, and create a winning culture.
If this seems hard to believe, just look at Illinois Tool Works. ITW famously developed 80/20 in the 1980s to drive growth. Their results? They went from $300 million to over $18 billion.
Don’t believe the myths; believe the data, and believe the results.
How do I know 80/20 isn’t the myth? It’s in the results. My team has delivered more than $3 billion in operating income improvements to our clients in 10 years. We helped one client drive stock prices up over 540% in eight years. In the first six months of a recent engagement, our client had 29% growth and the flow through to the bottom line was 45%! Don’t believe the myths, believe the data, and believe the results.