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How Do We Apply the 80-20 Rule Anyway?

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We hear the 80-20 rule, and it has repeatedly proven true: 80 percent of the outcomes come from 20 percent of the causes.

There are so many needless meetings in the day and so many operations that don’t play a critical role in a business that we must test new ways to allocate our resources. A top CEO earns 331 times more than an average worker. She can’t be working 331 times harder, so she must be focusing on things that get more valuable outcomes.

And thus the 80-20 is a great good place to focus on potential operating improvements. The key issue, though, is how we can take this concept and actually make it a part of our day in a meaningful way. While typically applied to inventory management, this concept can be applied to nearly all aspects of your business. Like most abstract concepts, though, things can get lost in translation between theory and application, so let’s walk through how to make this important concept a habit in your daily life.

One of the biggest misconceptions is that you simply do the 20 percent that produce the big impacts and stop doing everything else. This simply can’t work. You may not see a direct ROI on paying your electric bill, for example, but see what happens when you stop doing it. The truth is that in business, there are always things that need to get done, and not all of them are going to give you the big results. While the 80-20 rule can indeed help you identify things your business should eliminate all together, the most important lesson comes in viewing it as a matter of personal focus vs. delegation.

As a small business owner, you are probably doing a bit of everything: Sure, you might spend time developing products or giving key presentations to expand your business, but you might also be running out to get supplies for the office, answering most of the customer service e-mails that roll in, answering inbound calls, or keeping the office presentable. The first two are valuable; the rest are not.

You might be thinking, “But if someone doesn’t answer the phone? How are those people going to get their concerns resolved? Answering those phone calls is important.” 

You’re right. Those phone calls are important, but importance is different than value.

Those calls absolutely need to be answered, but you could invest a handful of hours to hire and train someone to take those calls and pay them $12-$15 an hour. Now you just freed up time to focus on the parts of your business that can earn $100 or $1,000 per hour.

Therein lies the key: separating the concepts of value, importance, and urgency. By hiring someone to answer your phones, for example, you are outsourcing something that is important and often urgent but not particularly valuable – meaning that the price you can put on the task itself isn’t particularly high. In contrast, developing a new product or developing an effective marketing strategy may not feel as urgent as those calls rolling in, but it’s substantially more valuable because it’s the thing the earns you the most money per hour and would be expensive to outsource or delegate.

Once you understand this concept, you can apply it to all sort of other aspects of your business like delegating straightforward e-mails or even outsourcing more complex work like website management and professional services.

When implementing an idea, often the hardest step as a business owner is the first one. Here’s a little thought experiment to hopefully make it easier: Look around at the non-valuable processes in your business that still need to happen to keep the business functioning. Start keeping track of how many hours per week you and your staff are personally spending on those things. Then calculate how much it would cost to use some alternative processes or pay someone to handle those things and then ask yourself this question: “If I had these hours free, could I use them to earn significantly more than what it’d cost to pay someone?”

In most cases, the answer is a resounding, “Of course!”

Congratulations, you just took your first step to 80-20-ing.

We’re a curious group here at Startup Connection, so if you did this exercise, let us know what you found. Did you discover operations that you don’t need to be doing? Did you identify parts of your business that you could outsource or delegate to increase your earning potential? We hope you did.

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