Although many people have heard of this ‘rule’ very few accountants consciously think about how applying the rule could help them and their clients.
The 80:20 rule is also known as the ‘Pareto principle’, the ‘law of the vital few’ and the ‘principle of factor sparsity’. Simply stated, the idea is that for many events, 80% of the effect comes from 20% of the causes. Another way of putting this is that 20% of what businesses (and individuals) do generates about 80% positive results. The percentages are not fixed; they are simply indicative of the fact that when you examine what is going on in your life, you will often find that a small proportion of your activities have a disporportionate impact as compared with all of the others.
I first read the seminal book by Richard Koch, (“The 80 20 principle“) in 1996. This explains how we might benefit from recognising how often this counter-intuitive principle impacts our business lives. I often return to the book for inspiration. Equally I often raise the idea in my talks and during mentoring sessions. Essentially about 80% of what you or your practice does is unimportant or a waste of time. The key is to figure out what’s really important or produces the most positive results and do it.
How might ambitious accountants apply this principle?
- Identify those 20% of clients who generate 80% of the firm’s profits (or of the partner’s contribution) and focus attention on them rather than on the 80% of clients that take most time but only contribute about 20% of the profits;
- Allocate more resources to those 20% of your activities that generate the highest margin, rather than the 80% of activities that contribute much less – and take more time;
- Focus on those (20%) Networking activities that you most enjoy and which have the most prospect of generating worthwhile referrals, and stop wasting time by attending the others (80%);
- Devote more time to reading the 20% of accounting and tax news that is immediately useful and relevant as compared to the 80% of magazines, papers, emails and website feeds that are simply ‘interesting’;**
- Keep in mind the idea that there is often a ‘vital few’ as compared with the ‘trvial many’;
- Help clients to appreciate the importance of the concept to their own businesses.
** NB: It was partly this idea that led us to develop the weekly newsletter published by the Tax Advice Network. It simply contains timely, practical and commercial advice re at least 3 key points of immediate relevance and interest to accountants in general practice. No wonder so many subscribers renew year after year. Try it now for 4 weeks – no charge – to see what you’re missing.