Decision Making on a Budget

Making decisions with incomplete information is one of the most common, and most challenging, responsibilities any leader faces.   Effectiveness, the second level of coaching I use with my clients, often depends on the ability to both make decisions and take action in uncertain situations.  All too frequently, however, the desire to make perfect decisions can lead to analysis paralysis, so I offer my clients specific tools they can leverage to balance an appropriate level of analysis with prompt action.  Fortunately, as I have often written, leadership is a dynamic responsibility that frequently requires experimentation and iteration.  The need to make a decision and take action is hardly the need to carve those decisions into stone or to solve all of the company’s problems in a single, brilliant statement of strategy.  Breaking down the challenges a company, or leader, is facing and finding the areas of highest impact can guide leaders towards effective decisions even in confusing and messy circumstances.  How can leaders reliably identify effective decisions and courses of action despite a lack of complete clarity?  By leveraging the 80/20 Rule!

The 80/20 Rule, also known as Pareto’s Law, is an informal but powerful concept: 80% of effects come from 20% of causes.  Italian economist (and engineer, philosopher, sociologist, and political scientist) Vilfredo Pareto created the Pareto Distribution, a mathematical probability distribution that has proven useful in many fields.  Pareto himself determined that income, land ownership, and several other socioeconomic principles can be graphed using his expected distributions, and even more concepts governed by Pareto distributions have been uncovered in the century since his death.  This is all a rather long way of saying that the 80/20 rule has its foundations in rigorous mathematical theory, but fortunately the practical implications are much easier to understand.  Every leader can confirm that when there is an issue that needs attention, there are usually several causes contributing to the situation.  While it can be tempting to track down the full list of factors before making any decision, the 80/20 Rule tells us that we only need to identify the 20% of factors that are contributing most to the situation to address 80% of the problem.  You may still worry that identifying the right 20% still requires a complete list but the lesson of the 80/20 rule is less precise: as long as the primary contributors have been identified, the vast majority of the issues can be addressed.

Pareto’s Law can have almost limitless applicability to business, from daily work prioritization to bottom line results.  Many leaders are challenged by prioritization and ultimately spend their time on what interests them most or the fire right in front of them, which may not be the most effective use of their time.  One way to help with prioritization is to first look at your activities and ask yourself for each one, “would I be willing to pay someone my hourly rate to perform this task?”  Since most leaders are willing to pay a higher rate for work that they know will yield high-impact results, this can be a great way to determine if the task at hand is likely to be part of the “20%”  When asked this simple question, we often find that the grocery store owner is willing to pay someone to slice the deli meat, the office manager will delegate sorting the mail, and the company president will expect his sales leader to make the sale.  But before they have been explicitly asked to quantify the value of these tasks, these leaders will gladly slip into these roles - sometimes at a great cost to the business.  For those leaders interested in making the best use  of their time, sorting tasks first by value and then by impact will lead them to focus on the 20% of items most likely to achieve their desired results.

Another common error is to confuse low hanging fruit with the 20% of causes indicated by Pareto.  Only “needing” to address 20% is very different from saying that a leader can focus on the easy stuff, just that the leader can achieve the desired results without tackling every possible contributing factor.  When the low hanging fruit is in the 20%, everyone wins!  But when the low hanging fruit is minimally impactful, a deeper dive is required into the best use of resources.  Effective application of the 80/20 Rule requires a clear articulation of the end goal in order to identify the “correct” 20%.  Without a vision, level of difficulty becomes the primary measurement to determine what should be done.  For example, the need to create a long term vision for a business without a plan is definitely part of the 20% that will have the highest impact, but hardly anyone would argue that creating a business plan from scratch is low hanging fruit.  Similarly, I have written previously about the need for leaders to focus rather than to chase the latest shiny object.  Often, the shiny object feels like “low hanging fruit” since enthusiasm clouds our ability to determine how much effort will truly be required.  Do not mistake your passion for value.  Determine your 20% based on the goals and plans you have created your business.  If there is a misalignment between what you want to do and what the plan directs you to do, reassess your plan before running off to do the new thing.  You may have to leave your newfound dreams behind but you will likely soon remember why you chose your long term vision and be grateful for the progress you make in that direction.

While the concept may now seem simple, trusting the 80/20 rule can require a leap of faith.  Unfortunately, I have seen firsthand the ramifications of ignoring the 80/20 Rule.  There are few businesses that have just one way to make money and even fewer small businesses that prioritize their work based on impact to the bottom line.  I recently worked with the owner of a landscaping business who faced this exact challenge.  When he first purchased the business, his client list included people looking for standard lawn maintenance, but his passion was landscape design, a product that was not only more personally fulfilling, but more lucrative as well.  Through several coaching sessions over the course of a summer season, this owner started each meeting complaining about the meinal work he was doing each day just to keep the lawn maintenance business afloat, leaving him little time to develop his landscape design business.  Even worse, he was unable to keep up with the design business that he had already won!  Yet he was reluctant to delegate the maintenance work to a qualified employee.  This owner was mistaking low hanging fruit for high impact work.  It was easy for him to continue doing the work he had always done but that work had little meaningful impact on the business - it was outside the 20%.  Without a willingness to shift his focus and dedicate energy to impactful change, his business was doomed to stagnation and he was likely to spend the rest of his days complaining about the menial labor.

Luckily, we all have opportunities to change and our landscape owner is no exception.  After looking at the numbers, he realized that design work had the highest margin and a few design jobs would quickly surpass the lawn maintenance revenues.  Said differently, the owner realized that shifting his focus to fewer jobs with higher impact was a way to focus on the 20% that would bring meaningful change to his business.  This realization also meant that delegating the maintenance work carried lower risk to the business overall.  As long as he was successful in building the design arm of the business, keeping the maintenance work afloat became a “nice to have” rather than critical to the success of his company.  Within a single season, he became willing to rethink his prioritization and recognized that personally keeping the lawn maintenance side running while still developing the landscape design effort was not practical.  Leveraging the “would you pay your own salary to do this work” strategy, he was able to successfully delegate the maintenance work.  This created a true win/win/win because he no longer had to do the work he found unfulfilling, allowing him to feed his need for creativity while simultaneously strengthening his team with growth opportunities and improving his overall bottom line.

Unlike some small business leadership principles, the 80/20 Rule serves large businesses equally well.  With high volume revenues, large companies can clearly see when 80% of their revenue is being generated by 20% of their clients and develop service delivery strategies that are modified for their 20% tier customers.  But whatever the size of your company, don’t let the fact that 80% is less than 100% distract you from making progress.  All progress has to start somewhere and 80% is a heck of a lot better than 0%!  By constantly iterating and assessing your current 20%, growth will be ongoing and fruitful.  You can start today by trying to identify the top 3 levers for your own business.  Those levers may prove to be only a subset of your 20% but it will give you a sense of where to begin.  I spend my days supporting leaders and owners in these assessments so I can assure you that there is always help available if you need it.  Regardless of whether you decide to track down your 20% alone or with the help of a business coach, finding your highest impact levers rather than being distracted by low hanging fruit will position your business for success.