Is it possible to accomplish 80% of the results with only 20% of the effort. When you think about how you spend your time, or how your business spends it time, does it seem that around 80% of your results can be tied with 20% of your efforts? What would happen if you spent 100% of your time focused on the 20% that produces the most? How do some people seems to succeed at such astronomically higher levels than everyone else? Vilfredo Pareto believed he figured it out in 1897 and I'll do my best to share those ideas with you now
Hunter Powers: Welcome to The One. I'm your host, Hunter Powers, broadcasting live from our nation's capital, DC proper, Washington DC. Today's one idea is the Pareto Principle, also known as the 80/20 rule. In short, the Pareto Principle suggests that 80% of the outcome can be derived from 20% of the input. 80% of the results can be generated by 20% of the actions. This concept was discovered by an Italian economist, Vilfredo Pareto.
Hunter Powers: In the late 1800s, Vilfredo observed that wealth was not distributed equally, and it seemed to be weighted heavily to a small group of people, a small group of people controlling the majority of the power and wealth, something that we may still observe today, but Vilfredo waned to understand why, what was going on here and could he explain it in economic terms. So he started small with a study of land ownership in Italy, and what he found was that 20% of the people in Italy owned 80% of the land. This observation and its mathematical relationship was recorded in his first published work, Cours d'économie politique, published in 1896.
Hunter Powers: Pareto would go on to show that the global distribution of wealth followed a very similar relationship where 82% of all the world's wealth was controlled by 20% of the people. This relationship in mathematical terms is known as a power law. A power law is a functional relationship between two quantities where a relative change in one results in a proportional change in the other, meaning that it isn't a linear or one for one relationship. So most relationships or the default relationship that you look for between two things is linear.
Hunter Powers: An example of this would be an hourly wage. Let's say you make $15 an hour. If you want to make $15 more, you work one more hour. If you want to make $30 more, you work two hours. This would be a linear relationship. If it was a power law, it might be true that if you work one hour you make $15 but if you work two hours, you make $60, and if you work three hours, you make $240, so a relative change in amount of time that you are working resulting in a proportional change to the amount of money that you are making. That would be a a power law.
Hunter Powers: A power law can be observed in something common like a measurement of area. If you imagine a square, a square room, it's two feet long by two feet wide or four square feet. Now if we increase each side by just one and go to three feet wide by three feet long, our area, the area of the room, goes from four to nine, whereas you might initially assume that because they added one to each of these, that it should increase by two but it's increased by five. So Pareto observes that power, and really wealth as a proxy for power, follows a power law distribution. 20% input results in 80% output.
Hunter Powers: In the years since 1896, this principle or this distribution continues to be observed throughout all industry and fields. An example from my field of technology. In a report by Microsoft, they observed that by solving the top 20% of reported bugs, that 80% of the crashes or system errors would go away. In sports, they found that 20% of the exercises and the habits of the athletes have 80% of the overall impact on their training. In health and safety, they found that 20% of the hazards at the workplace result in 80% of the injuries, and the list, it goes on and on and on. And you can find more by Googling the Pareto Principle and observations and applications.
Hunter Powers: Now, that's all interesting, but why is the Pareto Principle the one idea for today? So it starts as just an observation, an observation that 20% of the effort in most things appears to result in 80% of the outcome. So in simpler terms, 20% of what you are doing every day is driving 80% of the results that you are seeing in general. If you're working at a company or you're looking at a company, 20% of what that company does is driving 80% of the results that company sees. The other 80% of the effort is focused on the remaining 20%, right? Most companies have their bread and butter, the thing that they're known for, but then they end up spending a lot of time working on something new, working with a particular type of customer that they want to have or working with very hard to get along with customers. But when you boil it down, 20% of their total efforts are resulting in 80% of the outcome.
Hunter Powers: So here's where it gets interesting. What if they only focused on that 20%? Well, first, they would only generate 80% of the outcome. So let's just imagine they're doing $1 million of business a year and they say, "Going forward, we are only going to do 20% of the work." Well, then they would only generate $800,000 and not the full million, but what they've gained back is the other 80% of their time. And so the story goes, what if they spent 100% of their time on those 20% efforts? 100% is five times 20%, $800,000, and 20% of the time, they focus only on those activities for their full-time, they should make five times $800,000, or $4 million. And this is the basic idea of leverage, of compounding, but explained in an alternate form. How can you take your business from $800,000 of output to $4 million of output? And the answer is by focusing on 20% of everything that you are doing, but the right 20% and the 20% that is resulting in 80% of the outcome. You are only focusing on the highest leverage activities.
Hunter Powers: Now, the same can be applied to your life. What is the goal that you are working on, the outcome that you're seeking? And as long as you're making some progress towards this goal, upon analysis, you will likely find that 20% of your efforts towards this goal of yours are producing 80% of the effort. And so the suggestion is to focus solely on that 20% if you want to maximize the outcome. And this is how we find ourselves with these unequal distributions. Why do some people seem to have so much more than everyone else, and not just a little bit more, but a proportional relative change? If the average company is making $1 million and this company is making $4 million with the exact same quantity of inputs, they have captured four fifths, or 80% of this available marketplace, and how do they do it? By focusing all of their efforts on the high leverage activities.
Hunter Powers: Now, this idea can be extended even further. An important note is that you don't want to extend it further until you've mastered the first level. Have you identified what 20% of activities in your life or in your business are producing the vast majority of all results? And have you optimized so that that is where you or your business is spending all of its time? If you have, good, and now we can start exploring the next level. You see, Pareto's principle works on itself. You can apply Pareto's principle to Pareto's principle. So if 20% of the effort results in 80% of the results, then 20% of the 20% effort results in 80% of the 80% of results, or put another way, 4% of the effort results in 64% of the results. So in 4% of the time, the total time, you should be able to accomplish 64% of the total results by focusing on the highest leverage activities. And now, if you can spend your full time focused on those 4% activities, you can truly see geometric growth in your outcome.
Hunter Powers: Let's go back to that original company that did $1 million a year. So they're going to focus on 4% of their activities. Is this going to yield them 64% of the results? So $640,000. So they've lost a lot right off the top. $360,000 down the drain, but they're only spending 4% of their time. The other 96 is still there, and so they spend the other 96% of their time focused on the 4% activities. We take that $640,000 that was obtained with 4% of the time and we multiply it by 25. 25 times four is 100, and we get $16 million, 16 million. So we've gone from being a $1 million company to a $16 million company by focusing on 4% of what we do.
Hunter Powers: Now, there is a limit. There's what we call the TAM, or total addressable market. There's only so much business to be had in this one area. There is a concept called Pareto Optimality where you've taken this idea to its end where there are no more results to be achieved and while you should still be able to take 20% of your work and get 80% of the results, you're not able to compound that 20%. You can't say, "Okay, now I'm going to focus on 100% of my time on these 20% efforts anymore because there's just no more market to be had." But this is the reason or an explanation of how a few can capture the whole. Why is wealth and power so unevenly distributed? Because those individuals or those corporations understand the Pareto Principle, and maybe they don't have an explicit understanding of it, but they have an implicit understanding of it. They have figured out what high leverage activities to focus 100% of their time on while you are doing everything else.
Hunter Powers: Peter Thiel in his book Zero to One says that when he is evaluating a new investment, he asks founders what is their 10 year plan, what do they hope to accomplish over the next 10 years? And inevitably they lay out some grand vision of total world domination. And then he quickly asks the followup, "How could you accomplish the same thing in the next six months?" And if they don't have an answer, if they're completely stuck, he won't invest.
Hunter Powers: And now, I could ask you the same thing. What do you hope to accomplish in the next 10 years? What is your grand vision? And by the way, it doesn't have to be all that grand. What is it you want? Where do you want to go? 10 years is a really long time. You can do a lot in 10 years, and now how could you get there in six months? And if you don't have any ideas, then I guess I can't invest in you. But now you do have some ideas. And that idea is the Pareto Principle. Your answer could be as simple as, "I am going to apply the Pareto Principle. I am going to identify the highest leverage activities and focus on 100% of my effort on them. And as that starts to level out, I will again analyze the highest leverage activities, find the 20% and focused 100% on them. And this will guarantee me my Pareto Optimality and that I am achieving at the highest possible levels."
Hunter Powers: And that is your one idea for today. I am Hunter Powers, broadcasting live from our nation's capital, as we say in the city, DC proper. And until next time ...