80/20 or bust

Pareto Rules

In 1897, Italian economist Vilfredo Pareto noted that wealth was distributed unevenly. 20% of the people owned 80% of the assets. The Pareto Principle, also known as the 80/20 Rule, says that often, 80% of the results come from 20% of the effort.

 

20% of people have 80% of the wealth

20% of the sales force makes 80% of the sales

20% of criminals commit 80% of the crimes

20% of the carpet gets 80% of the wear and tear

20% of the products account for 80% of the profits

20% of the defects cause 80% of the problems

20% of the suppliers provide 80% of the stock

20% of the stock fills 80% of the warehouse

20% of the staff causes 80% of the problems

20% of the project takes 80% of the time & resources
(the first and last 10%) On the web, Lou Rosenfeld says,

80% of your site's users belong to 20% of the site's audiences.

80% of users' information needs are served by 20% of the site's content.

80% of users' navigational needs are served by 20% of all possible architectural components.

80% of users' searches are represented by the 20% of unique searches that appear most frequently.

Do you see a pattern here?


The “80” and “20” aren’t precise. You can interpret the 80/20 as saying, “A small part of the overall effort produces most of the results.”

The results of many decisions are what the Department of Defense calls asymmetrical. Putting your chips on the high-impact people or activities provides more bang for your buck. If you’re selecting people for sales jobs, a 20% candidate is obviously a better choice than an 80%-er. Sixteen times as much! Here’s the math:

Top Performer 80% output/20% input

So-so Performer 20% output/80% input

Time is all we have

The Pareto Principle also applies to the investment of time in getting a job done.

Often, less than 3% of the elapsed time performing a process has anything to do with real work.[1]

Manufacturing companies spend anywhere from 5-10 percent total time actually adding value to the product.[2]

Mangers and supervisors spend less than 25% of their day doing what they were hired to do. Most of their time is spent putting out fires.


 


My original graphic said Fluff instead of Ancillary, but I decided that was misleading. A worker drinking a cup of coffee isn’t moving widgets down the assembly line, but it’s an ancillary activity without which the worker would quit.

Geoff Moore’s Living on the Fault Line says anything that raises one’s stock price is core; everything else is mere hygiene. Do you bathe? Good. If you didn't you'd lose your job. But don't expect to receive a promotion for bathing no matter how squeaky clean you are. Differentiating on things that aren’t core is the single biggest waste of resources in Fortune 500 operations. Without very careful management, the ancillary stuff always gets in the way of core because it absorbs time, talent and management attention.

The way to prosper as an organization or as an individual is to hand off ancillary activities and put more time into core. It’s called “working smarter, not harder.”

Faster is better

A business that can do more in less time will have happier customers, lower inventories, and higher profits, but how can a business speed up its people? What kind of training would that take?

The answer comes from engineering. You’ve heard the principle described as lean manufacturing, time-based competition, kaizen, and zero-latency. If you’re familiar with the discussions coming out of Workflow Institute, it’s the real-time enterprise. Practitioners of six sigma look at it as reducing cycle time. They’re all about optimizing systems to speed things up.

Automobile manufacturers figured out what increased throughput was worth to them. Visit a Toyota or Honda assembly plant. You’ll witness a smooth operation. “From aerospace assembly to chemical manufacturing to production enhancement in oil and gas, our customers are enjoying bottom-line results and easier operations,” touts an ad.[3] Managers in pharma, intelligence, minerals, the military, and other sectors of industry are boosting profits through optimizing their processes and accelerating how quickly they get things accomplished.

It’s time for eLearning to adopt the approaches of the industrial engineers.

Process

A process is a series of steps that bring about a result.

Cooking a meal is a process. Walking the dog is a process. Brushing your teeth is a process. Making a sale is a process, as are sending a fax, writing a brochure, delivering a package, inflating a tire, developing a business plan, and assembling a computer. Bringing a new product to market is a process. So is bringing a new employee up to speed.

In sum, processes occur everywhere. Knowledge workers perform processes, not just factory hands. And a process may range from tiny (a memory cycle in your PC) to immense (a merger or acquisition). Conceptualizing a group of activities as a process enables us to analyze and often improve upon it.

Cycle Time

A business is a collection of processes that create value for a customer.

A process is a series of steps that occurs over and over again. A process begins with an input and ends with an output. Each time that happens is called a cycle. Every cycle has a start, a middle, and an end. The elapsed time from the start of one cycle to start of the next is called cycle time.

Factories and offices are not very efficient. In fact, workers spend relatively little time performing processes, the real work. Processing time in factories is often only 5% to 10% of cycle time. Knowledge workers spend only 5% to

25% of their time doing the work in their job descriptions.


The remaining 75% to 95% is Slack Time – time spent waiting for materials, looking things up, dealing with interruptions, fixing what didn’t make it the

first time, straightening up the work area, going to the bathroom, putting out fires, taking a cigarette break, answering wrong numbers, eating lunch, reading junk email, and learning how to do a better job.

Use the 80/20 rule to select an important process. Cutting cycle time by 1/3 increase profitability ten times over.

Generally, the processing itself is already quite efficient. It has been under the efficiency expert’s microscope for a good while. Also, it’s the smaller component of cycle time.

To improve cycle time, cut the slack. There’s a more to cut from. The slack is often made up of departmental anachronisms, historical accidents, slow start-times, linear processes that could be done in parallel, and things at boundaries that nobody has taken responsibility for.

An Example

A high-tech company sent new recruits to a two-week sales boot camp before sending them into the field to learn on the job. On average, it took new hires eighteen months to be selling at quota level ($5 million/year).

The company re-structured the process to include online learning on the technology in preparation for the boot camp. Freed of technical training, the boot camp focused on selling strategies. Structured online activities, mentoring, and seminars replaced the catch-as-catch-can learning from experience in the field. Shortening the slack cut the development cycle to nine months.

Do the math. ¾ year x $5 million = $3.75 million incremental revenue/person. This company was adding more than a thousand new sales people annually. That’s more than $3 billion in new-found revenue.



[1] FedEx Center for Cycle Time Research at the University of Memphis

[2] http://rockfordconsulting.com/cyc.htm

[3] http://www.processoptimization.com/
Posted by Jay Cross at March 22, 2004 09:15 PM | TrackBack

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