Business Metrics

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August 10 2016 // 5:00 AM

​Finding Your Company’s Sweet Spot with the 80/20 Rule

Written by Aaron Mitchell | @PAEVENaaron

Finding Your Company’s Sweet Spot with the 80/20 Rule

The 80/20 rule—also known by a less popular and less intuitive name, the Pareto Principle—is a simple concept that we can apply almost everywhere in life.  The 80/20 rule simply states that approximately 20% of effort results in approximately 80% of results.  If we look at that rule from a pessimistic, more glass-half-empty perspective, that means that 80% of the effort you put in results in 20% of the outcome.  That is quite amazing if you think about it.  Based on this rule, 80% of our time spent at work, home, or even at your rec-league softball game is only producing 20% of what you gain during that time.  Once you accept this rule as a reality, you can capitalize on that most effective 20% of your efforts, which result in 80% of your gains.

Now, how does this rule specifically apply to your consulting business?  Let’s focus foremost on your clients.

You may be amazed when you look at your company’s income from the past few years and identify what portion of that income came from which clients.  When you do this exercise and rank your clients in order from highest gross sales per client to lowest gross sales per client, typically you will find that approximately 20% of your clients account for 80% of your company’s income.  Imagine that!  The architectural and engineering consulting business I work for did this exact analysis and compared our clients and income for the past year; we found that the 80/20 rule absolutely rang true.  Now, what do we do with this information?  By performing this analysis and realizing that the 80/20 rule applies, you will identify your company’s top clients and understand that the remaining 80% of your clients may not be worth your time.

Let’s flip the script: 80% of your clients likely only provide 20% of your company’s income.  I’m also willing to bet that most of your (and your employees’) daily headaches originate from the clients found in the bottom 80% of your client list.  Or maybe those clients are easy to work with, but do you really need to spread your staff thin by working on several small projects that are not truly yielding large financial gains?

If you focus more of your time, effort, and resources towards that top 20%, you will leverage more income out of your best clients.  You may also want to focus on clients that you identify to have a high probability of becoming one of your top clients.  At the same time, you will decrease the amount of time, effort, and resources required of you on a daily basis.  What we’re talking about is running your business more efficiently by essentially removing a majority of your clients, while continuing to maintain or increase your revenue.  Your business would run with happy employees and owners who could be more focused, attentive, and responsive to your company’s most important clients.

Another wrinkle to the client comparison we just talked about is to asses which of your company’s clients actually pay their bills. We’ve already pointed out that collections is one of the top two most important aspects of your consulting business. If you missed that discussion, check out Business Metrics articles such as What’s You’re A/E Firm Doing About Bad Debt? and Cash or Accrual?  Is Your A/E Firm Using the Right One?.

You may find yourself shocked if you take the time to look at which clients actually pay and pay on time.  Wouldn’t it be great to only focus your company’s time and effort on just those clients who account for 80% of your business’s income and don’t require any additional time or overhead to chase your invoices down?  I say yes!

Of course we all know it is not that simple to just hack out 80% of your clients, even if they are truly only providing 20% of your income, because 20% is still a significant portion.  The key to all of this is to understand the 80/20 rule and learn to apply it to your business, while still servicing new and existing clients who have the potential to be a top client and be a key part of your company’s future growth.  In theory, the 80/20 rule will always apply to your client list, but the more you refine your client selection based on the 80/20 rule, the better your client pool becomes overall.

A second application of the 80/20 rule in your consulting business is to apply it to your services or deliverables you provide to your clients.  In this application the rule is most clearly stated as follows: 20% of the services or deliverables you provide to a client account for 80% of those services or deliverable’s value.  To give a quick example, 20% of a smartphone’s features actually account for 80% of the value that the smartphone provides to a user.  Think about all of the features available on your smartphone.  How many of those features do you use often, how many do you rarely use, and how many do you not use or even know about?

I’m willing to bet that you only actually use about 20% of the smartphone’s built-in features, and yet you think it is great.  This is exceptionally true for an architect or engineer preparing drawings for a client.  Realize that 80% of the time and effort you and your company spend on the design, drawing, and QA/QC process only yields 20% of what your client actually needs or uses on the drawings you provide.  By applying the 80/20 rule to the development of your design and drawings, you will be more focused on learning what exactly it is the client wants and needs, rather than what you think produces the best set of drawings.

Apply the 80/20 rule to key aspects in your business and you will see it run much more efficiently.  Efficiency is great for everyone.  Efficiency yields greater service and client deliverables, less time spent on tasks allowing your business to be more responsive, and finally and most importantly, happy clients and happy employees.  Let’s change the cliché “a happy wife, a happy life” for the workplace: “a happy client and happy employees, a great business!”

Aaron Mitchell, PE, SE
amitchell@paeven.com

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