You know you have many miles to travel when it comes to improving your business processes, but you’re likely wondering where to start. If you read my “secret sauce” blog post at the end of the year, you have my Strategic Alignment & Deployment guide, which is a blueprint for understanding your current state. That’s the only logical starting point for charting your course.
The SA&D guide helps you find your constraint, which is the step in your process that takes the longest or has the most backlog, or work in process (WIP). But sometimes when you do this exercise, especially if you aren’t crystal-clear on your current state or your destination, everything looks like a constraint. How do you decide which one should be your top priority?
The 80/20 Rule
To get to the heart of the matter, I recommend a lean tool called Pareto analysis. The Pareto Principle, also known as the 80/20 rule, has been a valuable secret weapon in my own work life, and it has helped more of my students and clients than just about any other method.
Vilfredo Pareto was an Italian economist working around the turn of the 20th century. In 1906, he articulated the principle that now bears his name: 80% of the wealth of Italy, he determined, was controlled by only 20% of its families. And this ratio bore out almost everywhere he looked: across countries, across cultures, across fields of study. He even conducted an experiment in his own garden, where he discovered that 20% of his pea pods yielded 80% of the produce.
This phenomenon happens for many different reasons—but the uneven distribution of success is what’s always predictable. In Malcolm Gladwell’s book Outliers: The Story of Success, which examines the world of high achievers, he reveals that more professional hockey players were born in January, February, and March (25% of the year) than at any other time. And if you look closely, you can understand the root cause. The eligibility cutoff for child hockey league placement is January 1. Kids born in the first third of the year are older, stronger, and more mature than their teammates, and therefore receive the most playing time, one-on-one coaching, tournament opportunities, etc. If you were trying to make the system fairer, you’d break the sport up into more leagues starting at different times (smaller batches, a recurring theme on this blog). But if you were trying to exploit the system to create a family of future hockey stars, you’d be best served by timing your babies to come mid-winter.
What does this have to do with business processes? In any given data set, there’s almost always an imbalance—20% of your offerings bring in 80% of the revenue, or 20% of your products have flaws that cause 80% of customer service requests. And so on. If you can identify that 20% and determine the root cause behind it, you can exploit it to your advantage.
Take Pareto’s pea plants. If you could pick 20 out of 100 seeds that would produce 80% of your yield, would you even bother planting the other 80 seeds, considering how much land, water, nurturing, fertilizing, and weeding it takes to bring them to maturity? Maybe not, especially if you had limited resources.
In the business office, you do have limited resources. Doesn’t it feel like you have a hundred balls in the air all the time? That’s why you need to find the 20 percent of things you can improve that will provide you the greatest return of investment toward your stated goal.
Here’s how Pareto came into play when I was in the aircraft maintenance, repair, and overhaul business:
- In my own company, we found that $33M in accounts receivable was outstanding greater than 60 days. Pareto analysis found that only 20 out of 102 customers were responsible for $31M of that total. If we could focus our efforts on getting just those 20 to pay up, the books would look much better, much faster. Even more important: if we could identify the root cause of those 20 clients paying late, not only would we find a probable cause for the other 80 percent, but we could also look at how to prevent late payments in the future. Was it the invoicing process? Was sales going after clients that were not creditworthy? That was important information to have.
- In repairs, 23% of the budget was spent on just 23 part numbers out of thousands. Also, 1200 out of 10,000 part numbers cycled through the shop for repair more than four times a year, so if we could find the root cause of that problem, we could eliminate 4800 visits off the bat. Plus the same fix might apply to other part numbers as well.
- Thirteen part numbers were responsible for 80 percent of the net loss of another company’s yearly profit. If we found out what was causing the loss on those 13, we could stop the major losses and then apply it to the other parts that were not as profitable as they could be.
Tackling all these choke points yielded outstanding results. In fact, regarding the final problem, we found that the issue was the cost capture process. When we fixed it, the organization went from losing $30K per month to making $25K a month in profit.
A few other helpful examples:
- When documents go through a review process, it’s typically just a few reasons that cause most of the rework. For example, a client found that 24 of a possible 87 reasons caused most documents to be sent back to the creator—if writers could review their own work for those 24 issues before forwarding, they’d drastically improve their chances of avoiding edits.
- The U.S. Air Force determined that out of 535 members of the U.S. Congress, only 30 asked 80% of the questions to an Air Force liaison office. The fix was to be proactive and spoon-feed information to those 30, eliminating the need to react to inquiries.
- Twenty percent of healthcare patients rack up 82% of the expenses, according to the Kaiser Family Foundation. If we could find the root causes of their illnesses, we could realize huge gains in wellness and reduce healthcare costs by a staggering amount.
Finding Your 20%
Once you’re woke to this phenomenon, trust me—you’ll start seeing it everywhere. Only a small number of occurrences cause most problems. If you find the root causes of those occurrences, you can make an outsized impact relative to your improvement efforts.
How do you spot the 20%? You can buy programs to help you, but I just use Microsoft® Excel. Here’s a video I made to show you how:
With so many choices in front of you, it’s critical to take control and decide by design rather than randomly. If you choose the right 20% of problems to tackle, you’ll get a productivity or revenue boost of 80%. That’s pretty incredible ROI.
Excellent illustration, Bill.
For a minute I thought you were taking away a Super Bowl victory from my hapless Raiders, but then I see you broke them out by city. Hopefully you can add an entry next year for the Las Vegas Raiders, lol.
Wishing you the best!
Thank you James!