Applying the Pareto Principle

If you run a business, you must remember two things.

1. The Pareto principle: 80% of your profit comes from 20% of your customers. (This means, most of your jobs will be low profiting. Two out of ten will be very profitable, hopefully profitable enough to make up for the eight out ten that aren’t.)

2. The square root of the number of workers is the number of workers that generate true value, that value being what the customer is actually paying for. (This means, most of your workers are doing secondary or tertiary activities, or busy work, which is unproductive. If you employ 16 workers, the work of only four is the result your customers want. The other workers maybe helping the four, but their role is support.

So, with this knowledge, what can you do?

1. Identify which jobs are high profiting and perform those alone. Spend more time on job selection than job working.

2. Identify the workers who produce the work the customer pays for. Pay those workers more, equip them and train them to be even better. Offload as many support workers as possible, or put support workers on a different pay schedule (day hire, for example). Better still, replace support workers with devices, or ask your value producers what exactly they need to do a better job. If they say they need a support worker, fair enough. Hire one. But ask them to be specific about what they need that worker to do, and make sure he does it to the satisfaction of the value worker. This will make the value worker feel valued (because he is) and his work will improve if the support worker does his job in the way the value worker wants (not necessarily in the way you, the big boss, wants).

The bigger your company grows, the easier it is to lose sight of these two truisms. No matter what your business, these truisms must be recognised if you want to grow. Constant adjustments will be necessary if you are to maximise the gains these insights represent.