What is the 80/20 rule and how to use it to make better decisions

In the never-ending race for productivity, the 80/20 principle seems to be the talk of the town.

Although it might sound complex, you don’t need to be good at maths to figure it out.

Chances are, you have been applying this concept in your everyday life for quite some time.   

Try to estimate how many apps you use on your devices versus how many you installed? In the abundance of choices at a supermarket, we usually go for the same groceries we buy regularly.

You probably create 80 percent of your outfits with the same 20 percent of wardrobe items you possess. 

You can apply the 80/20 principle to supercharge your productivity, too. This rule can help you prioritize better, make better financial decisions, and even learn which professional relationships you should invest in.

So, let’s unlock the secrets of achieving more by investing less.    

What is the 80/20 rule? 

The 80/20 rule implies that 80 percent of outputs (consequences) result from 20 percent of inputs (causes). Simply put, a smaller percentage of our activities count for a substantially larger number of results. As we strive to work smarter, not harder, understanding this concept is essential.  

As a manager or business owner, you are probably challenged by limited resources.

Whether it is time, money, or staff, you need to make the best of what you have.

Applying this principle can help you allocate limited resources to the activities that bring the most profit.

The fastest-growing companies in the world apply this rule. For instance, Apple used the variation of the 80/20 rule when they developed the iconic Apple Newton Message Pad.

In a nutshell, the engineers figured out that “.01 percent of person’s vocabulary was enough to carry out 50 percent of handheld computer activities“. Another IT giant, Microsoft, used this rule to establish that 80 percent of errors root from 20 percent of bugs. 

Although the 80/20 rule sounds innovative, it’s been around for over a century. Let’s explore the amusing story behind it.

The man behind the 80/20 principle

The 80/20 rule is also known as the Pareto principle. The name originates from the prominent Italian economist and sociologist Vilfredo Pareto. Some of his most remarkable contributions include the study of the income distribution, which proves that the allocation of wealth does not happen by chance.     

His complex finding of the uneven distribution of wealth in Italy comes from his passion for growing vegetables.

A story has it that, while growing peas, Pareto realized that 80 percent of the vegetable produced originates from 20 percent of pea pods.

The same ratio was later applied to macroeconomics, indicating that 80 percent of the wealth in Italy was owned by 20 percent of the population.  

How is the 80/20 rule applied in business?

Now that we understand the concept fully, you might wonder how can the 80/20 rule be applied in business?

The rule points to the segments of your business that bring the best results or the most income. 

Some of the 80/20 rule examples include:

  • 80 percent of a company’s output is produced by 20 percent of employees 
  • 80 percent of profit is generated by 20 percent of customers
  • 80 percent of sales are made by 20 percent of sales representatives
  • 80 percent of a company’s success stems from 20 percent of business ideas

The rule does not imply that you should forget about the other 20 percent of your products, services, or clients. It simply sheds light on the segments you should focus on to maximize your business’s impact.  

80/20 rule

What can the 80/20 rule do for you?

The 80/20 rule can help you find out to which areas you should direct your efforts. We all have a limited amount of energy and time in a workday, so we need to make the most of it.

This rule can help you determine the 20 percent of your most important tasks and activities and wipe out less important things and time wasters. 

This concept can help you save time, money, mental energy, and effort.

It can also reduce emotional reactions and decrease stress levels as you focus on what truly matters. The key to success is recognizing which 20 percent of your efforts are pivotal and prioritizing them.   

The principle is universal and can be applied to a multinational company, small business or start-up. Managers, entrepreneurs, and team leaders need to embrace this concept as they need to maximize the results and efforts of the entire team.

The same goes for picking the right projects and closing business deals that will make the most profit. Over-diversification can defeat the purpose, drain your energy and lower your productivity.       

  • Improve your leadership skills with the 80/20 rule

You can upgrade your human resource management skills, improve team communication and successfully conduct an ideation process.

We all know that prompt decision-making is crucial to effective leadership.

Managers and entrepreneurs need to react fast and cleverly to seize the right opportunity for their business. If you try to collect all the information required to make a decision, the chances are that many of the opportunities will pass you by.

That’s why you need to embrace the 80/20 rule in decision making as well.

Collect 80 percent of the necessary information and make the decision in the first 20 percent of the time designated for this purpose.

Successful communication is all about being a great listener.

Let your employees do 80 percent of the talking if you want to improve your team communication. If you talk more than you listen, the chances are that your team expects to be told what to do and how to do it. This can severely impact the progress and growth of your company. 

A great deal of effective leader’s efforts should be put into empowering employees to take action, make decisions and solve problems.

The same goes for the ideation processes. Your employees should be able to think creatively and propose ideas, not just execute tasks. Encourage your employees to get actively involved in the ideation process so that they generate 80 percent of new ideas.

  • Use the 80/20 rule for better goal setting 

Setting goals is critical for every company’s success. It allows you to take control of the direction in which your company develops. Moreover, they serve as a benchmark to determine whether the company is progressing. If the company is not moving towards those goals, it is a clear signal to the management that corrective actions need to be taken.  

One of the core principles in setting and achieving goals is the SMART concept.

Your goals need to be specific, measurable, achievable, relevant, and time-bound. But, once you set your goals, you might wonder which ones should be given priority. Your focus and energy might be scattered to several goals you strive to accomplish simultaneously. 

That is when you should apply the 80/20 rule.

Creating a list of goals will help you set your mind straight on your long-term vision and motivation. Out of let’s say ten goals you wrote down, add value to every one of them based on perceived importance for the company. Calculated value should help you determine the top 20 percent of the goals you set. This directs you to the ones that you should focus on first, as they will lead you to 80 percent of business accomplishments.   

  • Use the 80/20 rule to boost your productivity 

Many people seem very busy when they actually manage to pursue only a small number of their daily goals. Most commonly, this happens when our focus is distorted on a large number of smaller or low-value activities, so people waste their time being busy instead of productive. What needs to be done is to direct our efforts to a smaller number of activities that make a greater impact.

Start with creating a list of pending activities for the next workday. Out of the listed activities, pick 20 percent of those you consider to be your top priority. Use the impact criteria to prioritize, and devote your daily efforts to the most impactful assignments.

When choosing your daily priorities, giving the answers to the following questions can be helpful:

  • Is this task urgent to resolve or of vital importance for my business?
  • Does it bring profit or put us closer to achieving our goals?
  • Can it be delegated or outsourced?

If you are an investment manager, closing investment deals and managing the portfolios of your clients can be your top 20 percent activities. But, you also need to know about available investment grants, incentives, and subsidies. You also need to have all the documentation prepared and data sorted. These tasks can be delegated to other members of the team, giving you the chance to block off your time for the activities that make the most impact.

Read more about how you can measure employee productivity in your team.

  • Be more efficient in resolving issues with the 80/20 rule 

Problem-solving is a daily task for every manager or entrepreneur.

Whether you face customer complaints, product malfunction, or human resource issues, the 80/20 rule can be applied to every problem-solving process. As the problem might stem from several causes, what you need to do is follow these steps to determine the best solution:

  • Pinpoint the issues your company is facing  
  • Trace problems with methods such as Root cause analysis
  • Assign a value to the issues identified depending on the impact they have on business
  • Batch similar problems into categories based on their cause
  • Calculate scores for every group
  • The group with the highest score makes the top 20 percent of problems 
  • Create a problem-solving strategy 

This way, by resolving the top 20 percent of problems, you can mitigate 80 percent of the damage. 

  • Choose your decisions wisely

You make thousands of decisions every day, but not all of them have an impact on your life.

However, the 20% of irrelevant decisions each day can take up 80% of our energy, leaving too little focus for decisions that actually matter.

If you track the time you spend on making different decisions every day, you will see that you can save a few hours every day by eliminating small, trivial decisions.

Establishing habits and patterns and decreasing the number of choices can help you remove the trivial decisions from your plate so you have time to devote to important business decisions.

For example, if you opt for a capsule wardrobe, you will spend less time choosing what to wear for work each morning.

Or, if you schedule your team meetings for the same time every week or month, you don’t need to decide what time slot works best for your team the current week.

Optimize your business growth with the 80/20 principle

We hope this article was both interesting and helpful in understanding the 80/20 principle and what it can do for your business.

In case you need professional support in making most of your resources and maximizing your business impact, do not hesitate to write to our consultants.

 

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