Question:

Dear Mentor,

I heard from a fellow CEO that his company is having great success and exponential growth with 80/20. That colleague runs a manufacturing company. I run a similarly sized service company. Would 80/20 also work for us?

-Service and Curious

Answer:

Dear Service and Curious,

A very common statement we hear about 80/20 is that it is only a "manufacturing thing,” and that it "won't work with service businesses.” Nothing could be further from the truth.

80/20 strategies, when applied thoughtfully, can significantly enhance any business performance, demonstrating that focusing on what truly drives success and cutting out inefficiencies leads to remarkable results.

If a business has revenue, customers, and employees, then 80/20 will work.

Those who believe that 80/20 is only for manufacturing businesses believe, mistakenly, that 80/20 methods are only used to make manufacturing processes more efficient, to reduce the steps involved in making something (and thereby cut the cycle time) leading to a lower cost to produce. Certainly, 80/20 can (and is) used to do these things, but that is not where 80/20 really shines. At its core, 80/20 champions the wisdom of the old adage "never strive to be good at something that you shouldn't be doing in the first place.”

In a service business, the first step in 80/20 is to evaluate the customer roster. Invariably, there are "80" customers (big and important) and "20" customers (small and much less important...even irrelevant). 80/20 methodology first ensures that the "80s" (upon which the business depends fully) are serviced remarkably well. The ability to do this relies on the ability to provide more resources to these customers, which we can do because we simultaneously change the terms of service to the "20s." Our new price to the "20s" is made much higher: a price point which allows us to invest in more resources to give to the "80s." If that price point is too high and the "20s" choose not to work with us any longer, we can repurpose some of "freed up" resources to the "80s," while taking some cost savings to the bottom line. Once this initial customer strategy is accomplished, we gain share with more "80s," because every "80" and potential "80" will be interested in the breakthrough service that we—and we alone—provide in the marketplace.

That's what we do in a service business. It is also exactly what we do in a manufacturing business. There is no difference in our approach.

In addition, in a manufacturing business, we'll go through our product roster and separate them by "80" and "20," just as we did with our customers. And, again, we'll then overserve the "80s" and either price up or eliminate the "20s," just as we did with our customers. In a service business, we'll do the same thing with the suite of services we offer.

Customer and product optimization is only the first step of many in the 80/20 process. It is followed by strategic action plans aimed at profitable growth, none of which are particular to manufacturing OR service businesses. Even the use of 80/20 to optimize manufacturing processes finds its way into the service world—any service we offer is still a step-by-step process from start to finish, and not immune to the positive 80/20 effects.

Throughout my career, I've implemented 80/20 to transform numerous service businesses, including a commercial equipment repair and installation company. Initially, this business was generating $330MM with a 7% operating profit. After implementing 80/20 strategies, we focused on our core customers and services, which boosted revenue to $400MM and operating profit to nearly 30%. Similar results were achieved in every other service business among the dozens I have worked with.

The transformation involved nothing extraordinarily different than the way 80/20 is applied to manufacturing businesses. We identified our smaller, less profitable customers ("20s") and realized that we were diluting our efforts by providing non-essential services to them. Conversely, we streamlined our efforts to better serve our large, key customers ("80s"). For example, we dedicated our best technicians to exclusively serve these high-value "80s," ensuring they received top-notch service, which in turn attracted even more high-value customers from our competitors.

This approach underlines the importance of efficiently managing our most vital resource: our people. In a service industry, where your team is your product, measuring performance rigorously and making informed personnel decisions based on these metrics is crucial. This ensures that the most effective team members stay on board, maintaining high standards necessary for our success.

So, does your business have revenue, customers, and people who work for your company? If so, 80/20 done properly will, without question, make your business better...whatever it does and whatever it sells.

-

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