80 percent and 20 percent written on a chalk board
Review

Author interview: Richard Koch, ‘The 80/20 Principle’

Image credit: DREAMSTIME, MICHELLE CHAPLET

It won’t come as a surprise to learn that most of our time and resources are misapplied, but as engineers we want to know why. Entrepreneur Richard Koch revisits the Pareto principle in the 20th anniversary edition of his bestseller.

It’s hard to imagine how a 19th-century Italian engineer and economist could have much influence over today’s workplace practices. But Vilfredo Pareto, who gives his name to the eponymous principle, has been immortalised, in the world of management self-help manuals at least, by coming up with the hypothesis that 80 per cent of results or output come from 20 per cent of causes. Sometimes it can be radically smaller. As any journalist or secretary of a certain age knows, with a knowledge of Sir Isaac Pitman’s system, you can write in ‘shorthand’ once you’ve established that a mere 700 words make up two-thirds of conversation.

It’s a classic example of how complicated things can be boiled down to almost nothing. The author of ‘The 80/20 Principle’, Richard Koch, found this out early when mugging up for his finals at Oxford. Instead of doing what everybody else does – try to learn everything – he revised a few things very well and trusted that the same few questions would come up under examination. He walked away with a Congratulatory First, became an entrepreneur and is now worth £400m.

The exact proportionality of the principle is beside the point, the real insight being that input resources are wildly out of kilter with the output. For Koch this is never more obvious than in corporate management. “Really successful (and unsuccessful) corporate bosses probably only make two or three decisions of any importance in their entire career.” The rest of the time, he says, they’re doing inconsequential stuff such as attending conferences and making speeches, creating the illusion they are actually managing.

Koch’s career in management took off – after a few conventional jobs with Shell and Mars – when he joined the Boston Consulting Group (BCG), which he worked with on both sides of the Atlantic. “I got fired after three or four years because I wasn’t a very good analyst. BCG is a wonderful company, but I wanted to prove them wrong by becoming a successful management consultant.”

Koch decamped to consultants Bain and Company, “which proceeded to get bigger than BCG and a lot more profitable. They made me a partner quite quickly, which I think must have confused my former colleagues.” Three years later, Koch split from Bain to start strategy consultant LEK, but “after six years I got tired of working so hard. So I decided to quit, sold my shares and ever since I’ve been investing in start-ups, writing books in the sun as a hobby and generally enjoying myself.”

Despite selling millions of books on the subject of the 80/20 principle, Koch cheerfully admits that it’s not his brainchild. “It’s a well-​established economic principle that says that if you take the distribution of two different aspects of a problem – for example, the amount of money made and the number of companies making it – you will find that it is a small number of companies that make most of the money.”

This, says Koch, can be extrapolated to virtually any distribution set that works in this way. “In terms of general wealth, only a very small proportion of the population controls the vast majority of assets. Similarly, in engineering, if you look at the area of quality faults, there will be a very small number of reasons accounting for the vast majority of defects.” He goes on to say that in business, “it is always true that a small minority of salesmen sell most of the products”.

Koch says that this can apply to success in our work and careers. In particular, he thinks the idea works well with time. In keeping with previous examples, “it’s nearly always the case that a very small proportion of our time is responsible for most of the value we add, not just in terms of the day or week, but over a career. In almost any job there are a few incredibly important things that we do. In the case of a CEO, it might be a critical hire or fire, entry into a new market, pulling off a deal and so on.”

However, then the CEO, “because he or she doesn’t think that it looks very respectable to have a four-hour work week, invents a whole pile of other things that don’t add a lot of value to make up the time”. This could exhibit itself in the form of micromanaging or creating unnecessary projects: “In the case of an engineer, the idea for a new product could materialise in ten seconds.”

So why can’t we just come up with our best ideas on a Monday and play golf for the rest of the week? “I hear this a lot and I understand the point. A similar analogy here is the idea that you don’t buy the hamburger for the bread.”

It is more complicated than that, says Koch, because “the other stuff still needs to be done, only it needs to be heavily delegated. But we don’t really do that because we like being busy. Also, we’re not used to the idea that we can do things in a short period of time and that it’s OK to do that. Basically, if you’re the guy with the ideas, somebody else should do the less interesting and less valuable job.”

Management books serve little function unless we get to take something away from them and the key to applying the Pareto principle, says Koch, is for the reader “to work out what the 80 per cent and the 20 per cent might be. You need to construct an 80/20 hypothesis before you can make use of this. For an engineer, of the techniques you use in a particular product design, one or two will be hugely more fertile than all the others put together.

“You look at the ideas that have proved to be successful in the past (which will be a small number of the total) and that allows you to avoid doing a huge amount of work because you are only covering a narrow field. The trick is to be creative and think ‘what is really, really important in this situation?’ And there always will be something that is more important. But it might not be obvious what it is.”

‘The 80/20 Principle’ by Richard Koch is from Nicholas Brealey Publishing, £12.99

We read it for you: 'The 80/20 Principle'

According to GQ magazine ‘The 80/20 Principle’ is one of the top 25 most important management books ever written. It has also gone on to become one of the best selling. With literally millions sold in more than 30 languages, it has become a classic.

Fresh out of the box in 2017 is the 20th anniversary edition that has been rewritten and warmed up to address how the world has changed since the digital revolution. But the 80/20 rule itself remains as rock solid as it was when it was first described by 19th-century Italian engineer Vilfredo Pareto. Essentially 80 per cent of all output derives from 20 per cent of input, with the implication that 80 per cent of your input is wasted.

So does that mean we can work really well all day Monday and take the rest of the week off? It’s a possibility, but there’s more to it than that. A genuine management must-read.

Extract: What is the 80/20 Principle?

The 80/20 Principle asserts that a minority of causes, inputs or effort usually leads to a majority of the results, outputs or rewards. Taken literally, this means that 80 per cent of what you achieve in your job comes from 20 per cent of the time spent. Thus, for all practical purposes, four-fifths of the effort – a dominant part of it – is largely irrelevant. This is contrary to what people normally expect.

So the 80/20 Principle states that there is an inbuilt imbal­ance between causes and results, inputs and outputs, and effort and reward. A good benchmark for this imbalance is provided by the 80/20 relationship: a typical pattern will show that 80 per cent of outputs result from 20 per cent of inputs; that 80 per cent of consequences flow from 20 per cent of causes; or that 80 per cent of results come from 20 per cent of effort.

In business, many examples of the 80/20 Principle have been validated. 20 per cent of products usually account for about 80 per cent of dollar sales value; so do 20 per cent of customers. 20 per cent of products or customers usually also account for about 80 per cent of an organisation’s profits.

In society, 20 per cent of criminals account for 80 per cent of the value of all crime. Twenty per cent of motorists cause 80 per cent of accidents. Twenty per cent of those who marry comprise 80 per cent of the divorce statistics (those who consistently remarry and redivorce distort the statistics and give a lopsidedly pessimistic impression of the extent of marital fidelity). Twenty per cent of children attain 80 per cent of educational qualifications available.

Edited extract from ‘The 80/20 Principle’ by Richard Koch, with permission

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