Chapter 1: 2,000 Percent Solutions Are Available for Almost Any Activity

Chapter 1

2,000 Percent Solutions Are Available for Almost Any Activity

The material in this chapter expands upon pages 1-6 in The 2,000 Percent Solution.

A corollary to Pareto’s Law (referred to by many as the 80/20 principle, meaning that 80 percent of the results can be observed to come from 20 percent of the people doing an activity) states that 80 percent of the results of any economic activity come from 20 percent or fewer of the efforts. By examining an example of this corollary, the naturally high frequency of 2,000 percent solutions can be better understood.

Imagine that a business has 100 salespeople. Consistent with Pareto’s Law, 20 of those salespeople produce total sales of 80,000 units per year while the remaining 80 salespeople produce total sales of only 20,000 units per year. The most productive 20 salespeople average 4,000 units per year while the 80 less productive average sales of 250 units per year. The 20 most productive salespeople create 16 times (4,000/250) the results of the average of the 80 remaining sales people. Thus, just matching what the most productive 20 salespeople accomplish is a 1,600 percent solution.

Within the group of 20, some are more productive than the others. Let’s assume that the most productive salesperson produces annual sales of 7,000 units. That amount is 28 times what the 80 less productive salespeople average. If the less productive people can move up to the productivity of the most productive salesperson, that’s a 2,800 percent solution.

Within the group of 80, some are less productive than others. Let’s assume that the least productive salesperson who won’t be fired sells merely 100 units per year. If that person could match the most productive salesperson, that would be a 7,000 percent solution.

The nature of which customers are served may have something to do with why the two salespeople vary so much in productivity. But if the least productive salesperson can increase performance to half that of the average of the most productive group, that’s still a 2,000 percent solution

Let’s also assume that the company has a more effective competitor where the most productive salespeople average selling 10,000 units per year. Within that group, let’s also assume that the most productive person sells 18,000 units per year. If some of this success is based on selling methods that the least productive salesperson in the first company can emulate, that relatively low performing salesperson would only have to capture 1/9 of the results of this most productive competitor ‘s salesperson to achieve a 2,000 percent solution.

In addition, there are probably better performing salespeople in other industries who could also inform the lowest producing salesperson in the original company how to improve.

From the first company’s management perspective, notice that the problem is different. Only if all the salespeople in total improve their productivity by 20 times does the company enjoy a 2,000 percent solution. If the methods and personal qualities of the best few salespeople can be duplicated in the rest of the sales force, such a 2,000 percent solution can be achieved.

Pareto’s Law also applies to every other activity that a person does in a company: Twenty percent of the employees will produce eighty percent of the results. By learning from the best inside and outside the company, the most productive employees can improve further. Likewise, twenty percent of the customers will produce 80 percent of the earnings. So it’s important who you sell to and help as well as how efficiently you perform. Many organizations will find that their most effective salespeople are mostly bringing in business from relatively unprofitable customers. As a result the best practice may be found among a so-called average performer who only produces high margin sales. Cross-fertilize the methods of the high volume salesperson with the high-margin one, and you should increase the profit-productivity of sales efforts by much more than 2,000 percent.

For a given organization, simply measuring to find out who is the most productive and what they do differently that may account for their success can be a very powerful tool for helping others to expand their effectiveness. That’s why the few companies that do such benchmarking within a company are quick to find ways to make enormous improvements in their effectiveness.

At Mitchell and Company, we measured a large number of companies that did the same activities to see how their effectiveness compared to others. Much like what Pareto’s Law suggests, companies were highly effective compared to other firms in only a few areas … usually fewer than 5 percent of their important functions. Companies were about as effective as the average firm in about 30% of their important activities. And these same companies were well below average in the remaining activities.

That measurement made us realize the enormous potential of outsourcing. If you have some activity where you are well below average throughout your company, you may have the potential for a 2,000 percent solution by simply outsourcing that same activity to a top performing outside organization.

We all know that each activity varies in its significance. For instance, developing new medicines at a pharmaceutical company is much more valuable than most other activities. If your company is below average in such an important activity, the company-wide benefits of either improving to become above average or outsourcing to an organization that is above average can be a 2,000 percent solution for the entire company’s profits. As a result, those who are wise in selecting the activities to improve first can make much faster progress than those who focus in less significant activities.

Further, you should consider that some companies are making it a priority to develop skill in developing and implementing 2,000 percent solutions among as many people as possible. Such organizations will have vast advantages over those who simply look at the internal best practice, the industry best practice or outsource to a highly effective outside organization. Such companies will be able, instead, to advance beyond the future best practice towards the theoretical best practice. Implementing beyond the future best practice usually creates at least 5,000 percent solutions. Coming close to a theoretical best practice often creates 10,000 percent solutions. If you create a 2,000 percent solution that also serves to greatly expand the market by adding new users of your offerings, the gains can be an exponential factor larger.

From that perspective, you can see that achieving a 2,000 percent solution is often a modest target … even though at first blush it would seem to be the opposite, a stretch goal. Clients and students who have worked on creating 2,000 percent solutions were often able to reach 20 times higher performance levels within 6 months of implementing this process. Rarely does it take longer than two years to stimulate performance to these higher levels. Individuals who are developing 2,000 percent solutions usually report being able to create the plan for one with less than 60 hours of effort over a few weeks.

Questions to Help You Create 2,000 Percent Solutions

Now, let’s look at some questions to help you get started in achieving similar results. Since this is a workbook, we suggest that you jot down your answers in the spaces provided. These notes will be helpful to you when you repeat the eight step process in the future by reminding you of what you did and did not consider.

1. What activities in your organization have the most positive impact on total profits now?

For a mining company, the answer may be reducing the cost of raw materials by extracting the lowest cost ore first. For a manufacturing company, the answer may lie in avoiding costly errors in its products so that rework and warranty costs are avoided. For a wholesaler, the answer may lie in purchasing the lowest cost items and being able to keep those goods in stock with low inventory levels. For a brokerage firm, it may be interesting clients in trading more frequently in profitable ways for the clients and the firm.

2. What activities in your organization will have the most impact on total profits five years from now?

For the mining company, the answer may be locating new sources of lower cost ore. For the manufacturing company, the answer may lie in redesigning products and developing new products that are less expensive to make and cause fewer errors in producing. For the wholesaler, the answer may lie in creating new computer systems that allow for more efficient purchasing and management of inventory. For a brokerage firm, it may be adding new services and increasing the value of existing services to attract more profitable clients and retain them longer.

3. In which of these activities do you suspect that some of your organization’s efforts are much more productive than the least effective efforts?

Although you cannot know until you measure, you have probably observed differences in performance or heard stories that lead you to believe that there are differences in some areas. These differences may occur from individual to individual (such as how rapidly and correctly transactions are processed), office to office among people doing the same function (such as regional sales and administrative operations), or from plant to plant producing the same item.

4. What measurements already exist that could help you identify the size and value of these differences in performance?

In many cases, measurements are not available in a convenient form for this purpose, but could be assembled to help you understand differences. For example, you may have individual productivity by employee in some performance areas. Those individual data could be combined to determine if office by office productivity differs. That measurement would be helpful because it could help identify superior management practices in some locations that are not performed in other locations. Many people assume that such measurements only exist in accounting, information technology and manufacturing functions. Be sure to also ask people who work in the activities that interest you. You may be pleasantly surprised to find out that there are other measurements in place that you have never seen.

5. What measurements could you inexpensively add for other high value opportunities where you have no information about relative performance now?

Talk with those who would have to be involved in making the new measurements to learn their ideas about what can be done easily and inexpensively. Then, take a little time to make these measurements on a one-time basis. Later you can decide if it is worth continuing these new measurements.

6. What do the measurements you have already suggest the greatest differences in the value of performance are?

In looking at this question, you should be sure to consider the economic impact of differences in performance as well as the percentage size of the differences in performance. For example, your most productive salesperson may be selling 50 times as much as the least productive. But if everyone operated at that level, you might only save one percent of revenues. If everyone matched your most productive design engineer in finding less costly and more valuable ways to redesign existing products and design new ones, you might save as much as five percent of revenues. Obviously, the latter alternative would be the one to work on first assuming that all else is equal.

7. Where do you suspect that the greatest value differences in performance are among areas where you have no measurements available?

8. How hard will it be to make improvements in performance in the most valuable opportunity activities identified in questions 6 and 7?

In answering this question, you need to consider difficulty, risk of not succeeding, cost of working on the problem compared to what you can afford and how long you can expect it to take in the worst case. Many such changes are difficult. The most challenging are those performance areas where people have to change their long-held habits and beliefs. Don’t rely solely on your own judgment in answering this question. Speak with those who work in those areas as well as outside experts who have helped organizations improve performance in these areas.

9. What area of performance improvement should be your top priority?

Our suggestion is that you pick an area with a high payoff which can probably be improved rapidly with fewer resources and risk than other activities you are considering. Be sure to consider the potential enthusiasm with which those who will need to change will probably view the necessary adjustments. If in doubt, pick the activity where enthusiasm is highest for the needed changes.

Copyright 2005 Donald W. Mitchell