Notes on The 80/20 Principle

By Richard Koch

These are my notes on ideas and concepts I found interesting — not a comprehensive summary of the book. Buy the book →

What is the 80/20 Principle?

The 80/20 principle (aka the Pareto principle) states that 80% of the results come from 20% of the causes. A few things are important; most are not.

Thinking 80/20

80/20 thinking requires, and with practice enables, us to spot the few really important things that are happening, and ignore the most unimportant things. It teaches us to see the woods for the trees.

80/20 thinking is reflective, unconventional, hedonistic, strategic, and nonlinear; in that it combines extreme ambition (in the sense of wanting to change things for the better) with a relaxed and confident manner.

80/20 thinking is reflective

80/20 thinking is different from the type of thinking that prevails today. The latter is usually rushed, opportunistic, linear, and incrementalist.

Our objective is to leave action behind, do some quiet thinking, mine a few small pieces of precious insights, and then act; selectively, on a few objectives and a narrow front, decisively and impressively, to produce terrific results with as little energy and as few resources as possible.

80/20 thinking is unconventional

80/20 thinking discovers where conventional wisdom is wrong, as it generally is. The power of the 80/20 principle lies in doing things differently based on unconventional wisdom.

80/20 thinking is strategic

To be strategic is to concentrate on what is important, on the few objectives that give us comparative advantage, on what is important to us rather than others.

80/20 thinking is nonlinear

Traditional thinking is encased in a powerful but sometimes inaccurate and destructive mental model: It is linear.

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. Scientists and historians have long ago abandoned linear thinking. Why should we cling to it?

The most valuable insight from 80/20 analysis will always come from examining nonlinear relationships that others are neglecting.

Only a few decisions really matter. Those that do, matter a great deal.

80/20 in Happiness

Happiness is not money, and it is not even like money. Money not spent can be saved and invested and, through the magic of compound interest, multiplied. But, happiness not spent today does not lead to happiness tomorrow.

Happiness, like the mind, will atrophy if not exercised. 80/20 thinkers know what generates their happiness and pursue it consciously, cheerfully, and intelligently, using happiness today to build and multiply happiness tomorrow.

• 80% of our achievement and happiness takes place in 20% of our time — and these peaks can be expanded greatly.
• Our lives are profoundly affected (for good or ill) by a few events and decisions. We can improve our lives dramatically by recognizing the turning points and making the decisions that will make us happy and productive.
• Everyone can achieve something significant. The key is not effort, but finding the right thing to achieve. You are hugely more productive at some things than others, but dilute the effectiveness of this by doing too many things when your comparative skill is nowhere near as great.
• Most of our failures are in races others enter us into. Most of our successes come from races we want to enter.
• Few people spend enough time and thought cultivating their own happiness. They seek indirect goals like money or promotions that may be difficult to attain and will prove when they are attained to be extremely inefficient sources of happiness.

80/20 in Investing

Typically, 80% of the increase in wealth from most long-term portfolios comes from fewer than 20% of the investments. It is crucial to pick this 20% well, and then concentrate as much investment as possible into it.

Let those good investments compound: Nobody ever went broke by taking a profit, but many people never got rich by following the same procedure.

80/20 in Relationships

You don’t need many allies but you need the right ones, with the right relationships between you and each of them and between themselves. You need them at the right time, in the right place and with a common interest in advancing your interests.

Do not assume your friends and allies are all of roughly equal importance. Focus on your attention on nurturing the key alliances of your life.

You alone cannot make yourself successful (in any area of life). Only others can do that for you.

If you have a strong alliance with both X and Y and they have one between each other, that is excellent. A chin is as strong as it’s weakest link. However strong relationships between X and Y, the ones that really matter for you are your with X and yours with Y.

80/20 at Work

80% of the value in any organization or profession comes from 20% of the professionals. 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.

Being Intelligent and Lazy

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.

Identify where 20% of effort gives 80% of the returns: In any sphere of activity, 80% of people are achieving 20% of the results, and 20% of the people are achieving 80% of the results.

What are the majority doing wrong and the minority doing right?

80/20 in Winning

There are always winners and losers — and always more of the latter. You can be a winner by choosing the right competition, the right team and the right methods to win.

• You are more likely to win by rigging the odds in your favor (legitimately and fairly) than by striving to improve your performance.
• You are more likely to win where you hav e won before.
• You are more likely to win when you are selective about the races you enter.

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.

Key takeaways

• Most of what we do is low value.
• Some small fragments of our time are much more valuable than all of the rest.
• Treat time as a friend, not the enemy: Insight and value are likely to come from placing ourselves in a comfortable, relaxed and collaborative position towards time. It is our use of time, and not time itself, that is the enemy.
• If we can do anything about this, we should do something radical; there is no point tinkering around the edges, seeking marginal improvements, or making our use of time a little more efficient.
• The 80/20 principle says that if we doubled our time on the top 20% of activities, we could work a 2 day week and achieved 60% more than now.
• If we make good use of only 20% of our time, there is no shortage of it.

Make the difficult mental leap of disassociating effort and reward
We need to make a conscious effort to step away from the Protestant work ethic. We enjoy hard work — or at least the feeling of virtue that comes from having done it.

What we must do is internalize that hard work—especially for someone else— is usually not an efficient way to achieve what we want. Hard work leads to low returns. Insight and doing what we ourselves want leads to high returns.

Free yourself from obligations imposed by others
It is very difficult to make good use of your time if you don’t control it.

Eliminate or reduce low value activities
Since there is little value in the activities you want to displace, people may not actually notice if you stop doing them. Even if they do notice, that may not care enough to force you to do them if they can see that this would take major effort on their part.

The Top 10 Low Value Uses of Time

1. Things other people want you to do.
2. Things that have always been done this way.
3. Things you’re not unusually good at doing.
4. Things you don’t enjoy doing.
5. Thins that are always interrupted.
6. Things few other people are interested in.
7. Things that have already taken twice as long as you originally expected.
8. Things where your collaborators are unreliable or low quality.
9. Things that have a predictable cycle.
10. Answering the telephone.

The Top 10 Highest Value Uses of Time

1. Things that advance your overall purpose in life.
2. Things you have always wanted to do.
3. Things already in the 20/80 relationship of time to results.
4. Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results.
5. Things other people tell you can’t be done.
6. Things other people have done successfully in different arenas.
7. things that use your own creativity.
8. Things that you can get other people to do for you with relatively little effort on your part.
9. Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically an effectively.
10. Things for which it is now or never.

80/20 in Business

Your strategy is wrong
If you can identify where your company is getting back more than it is putting in, you can up the stakes and make a killing.

Unless you have used the 80/20 principe to redirect your business strategy, you can be pretty sure that the strategy is badly flawed.

It is almost inevitable that you are doing too many things for too many people.

A few things are always much more important than most things.
Keep the vital few in the front of your brain at all times.

A few people add most of the value
The best people generate enormous surpluses, usually far beyond what they are allowed to take out.

Managers love complexity
Complexity is stimulating and intellectually challenging; it leavens boring routine, and it creates interesting jobs for managers.

Customer value
Value delivered to customers is rarely measured and always unequal.

The 80/20 Customer + Marketing Gospel

The markets and customers on which any company shoukd be centered must be the right ones, typically a small minority of those that the company currently owns.

Three golden rules: Marketing, and the whole company, should:

1. Focus on providing a stunning product and service to 20% of the existing product line — the part that generates 80% of profit.
2. Devote extraordinary endeavour to delighting, keeping forever, and expanding the sales to the 20% of customers who provide 80% of the sales and/or profits.
3. You will only be successful in marketing if what you are marketing is different and, for your target customers, either unobtainable elsewhere, or provided by you in a product/service/price package that is much better value than available elsewhere.

Focus on the customer

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

A few customers buy a great deal, while a great number buy very little. The latter can be ignored. Aim to keep your best customers forever!

Extraordinary efforts to keep your core customers may look as though they are depressing profitability, but are bound to enhance it substantially over any meaningful time period.

Profitability is only a scorecard providing an after-the-fact measure of a business’ health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers.

The ‘Bezos Rule’

“Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.” — Jeff Bezos

Gather 80% of the data and perform 80% of the relevant analysis in the first 20% of the time available, then make a decision 100% of the time and act decisively as if you were 100% confident that the decision is right.

80/20 in Project Management

The art of the project manager is to focus all team members on the few things that really matter.

The shorter the time allowed for a project, the greater proportion of time that should be allowed for its detailed planning and thinking through.

How to plan a project using 80/20

1. 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.
2. Construct hypothesis on what the answers are, even if it’s pure guesswork.
3. Work out what information needs to be gathered or processes need to be completed to resolve whether you are right or not with your guesses.
4. Decide who is to what and when.
5. Re-plan after short intervals, based on new knowledge and any divergances from previous gusesses.

80/20 in Negotiation

Few points really matter
20% or fewer of the points at issue will comprise over 80% of the value of the disputed territory.

You may think this will be obvious to both sides, but people like to win points, even completely unimportant ones. Similarly, they respond to concessions, even trivial ones.

Therefore, build up a long list of spurious concerns and requirements early in negotiation, making them seem as important to you as possible. These points must be unreasonable. Then, in the closing stages of a negotiation, concde the points that are unimportant in exchange for more than a fair share of really important points.

Don’t peak too early
Most negotiations go through a phony war and only get going in earnest when the deadline looms.

80% of the concessions will occur in the last 20% of the time available.

E.g. When asking for a pay rise: If you have a 30 min meeting booked to discuss this, don’t make the request too early to permit a gracious compromise on your supervisor’s part.