Brainstorms: great ideas we have seen implemented and the results these ideas have delivered.

The 80/20 Rule and What It Means to the Sales Executive

By Drew Isaacman

Introduction

The 80/20 rule is one of the most cited in business circles today.  In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country.  In the late 1940s, Dr. Joseph Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto’s Principle.  While it may, in fact, be misnamed, many people since Pareto have observed similar phenomena in their own areas of expertise.  Today, it’s difficult to get through even one meeting, presentation or casual conversation, without at least one participant referencing the 80/20 rule to describe their particular business situation.

What’s It Really Mean

The 80/20 rule simply means that in system or undertaking, a few things (20 percent) are vital and many (80 percent) are trivial.  In Pareto’s case, it meant that 20 percent of the Italian people owned 80 percent of the country’s wealth.  In most situations, it can be shown that 80 percent of your outcomes derive from 20 percent of your inputs. So how does that apply to business and the business of Sales? While neither hard and fast nor precisely applicable to every company, chances are that if you look at the key metrics in a sales organization, a minority of the inputs affects a disproportionate share of the outcomes.  Some examples would include:

• A handful of customers producing the bulk of revenues
  
  
• A handful of products producing the bulk of orders and profits
  
  
• A handful of sales people producing the majority of new business

• A handful of sales calls yielding the bulk of account wins
  
  
• A handful of customers driving the bulk of complaints
  
  
• A handful of employees causing the bulk of the headaches for management
  
  
• Truly great performance achieved by a few easily identifiable individuals
  
  

The list could go on.  If we know these statements to be universally true, what does it imply for the sales executive?

What Does It Mean for the Sales Executive?

You would think, given the examples cited above, that most sales executives would have a razor-sharp focus on the 20% of resources, customers and products that account for the bulk of their output.  Our interactions with both Fortune 1000 and SMB clients alike indicate this is not the case.  While many sales executives know that their systems and processes should be focused on their most critical stakeholders, in reality, the bulk of their time and attention continues to be focused on the 80%...not the 20%.

When we work with a Sales team to improve their Go-to-Market Model, they are quick to point out the 20% of customers, selling resources and products that drive the bulk of the business…it is known to them.  But when it comes to evaluating their sales model, they just as quickly insist that each and every nuance be analyzed and evaluated as if it had equal potential to contribute to results. Call it “the theory of never-ending hope”.  Such an “unfiltered” approach to analysis and decision making often results in a waste of both time and resource.

How can this be?

How can individuals who know the criticality of “the 20%” on their business still pay too much attention to the less critical piece? We see several reasons:

• Measurement Rigor – While sales executives love numbers, they fail to consistently assess their businesses relative to the 80/20 rule.  These executives can have any custom analysis created at the drop of a hat; yet they rarely have an ongoing, fact-based management system that highlights the critical minority and its relative impact on the entire business.  Measurement systems should help management focus effort and resource where it counts.  And conversely, these systems should help them decide where NOT to spend time and resource.  Unfortunately, in the race to quantify and measure everything, modern measurement systems rarely provide such insight.
  
  
• Departmental Influences – Pressures from other departments such as Finance, Marketing and Service & Delivery require the sales executive to please many “constituencies”, sometimes not in the best interest of the critical “20%”.  A common example is when Marketing cites the need for extra Sales influence on a new product offering with no assurance that the product will be a primary component of the revenue mix moving forward. If Marketing moves on to the next big product campaign, Sales may have lost its opportunity to be successful with the core product portfolio.
  
  
• Backward-looking vs. Forward-looking Management Systems – If the Pareto principle has one caveat, it is this:  the 80/20 rule is easier to apply to past results than it is to future expectations.  And if we can’t accurately determine which customers tomorrow will make up the bulk of our profits or which reps next year will sell the most, then it is difficult to focus attention on those same entities.  But this is no excuse for not putting a stake in the ground and attempting to focus time and energy where it belongs. Let historical results be your guide.  Place some educated bets on those results and your future view of the markets in which you compete and rigorously measure results so you can adapt appropriately.

Summary

The Pareto Principle, while universally accepted and acknowledged, does not always drive the type of activity and provisioning that it so elegantly justifies.  To maximize their ability to “do more with less” sales executives should embrace this 102-year old principle more rigorously and manage accordingly.  It may be the surest way to rapidly and significantly improve operating results.