Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

80-20 Rule for Managing

It is so easy to get bogged down in the minutia of day to day job chores. Stephen Covey and others lecture and write books on how to get more done and be more personally productive. Fascinating stuff.

But an equally fascinating question is where do you begin? In my consulting practice I have very little time to gather rather global facts and ascertain what key issues should be addressed. I have found that one of the best ways to budget your time and to dedicate your management time and resources is to follow the 80-20 rule.

Simply stated this means, for example, that "80% of your profits come from 20% of your customers." From an engineering perspective this rule can be illustrated by the infamous bell curve of probabilities. On the high end or right side of the bell are those few outstanding examples of the hypothesis. On the lower end or left hand side of the bell a surprisingly comparable number of examples of the worst results of the hypothetical example. Or using the specifically stated illustration, "20% of our clients also represent 80% of our losses!"

So assuming that your firm is part of the statistically significant and relevant part of the printing industry and therefore your experience follows that of the rest of the industry, what are you going to do with these two extremes of the bell curve as far as they pertain to your client mix, marketing support staff, and customer service priorities?

First make sure that all key members of your staff know the answers to these (and other) 80-20 queries. In other words do your homework, keep it current, and make sure that appropriate staff has the information in which to act in unison. Again the question was not that 20% of our clients represent 80% of our volume but rather 80% of our profits! Very important difference. And these are not percentages but absolute numbers. A relatively small client might have the highest profit margin. This is not as significant as the #3 volume client is #1 in absolute profit dollars. So what do we do about these most valuable clients? Very simply stated, you nurture, you protect, and you grow this select base as well as monitor closely both the pulse as well as the future trends of this group.

And for those clients at the other end of the bell curve that are bleeding losses from the jugular vane, we need turn around or corrective plans. Again these are not small clients but are providing substantial volume of questionable net worth to the corporation. Are the losses due to an isolated job that went south and had to be rerun? If expectations have been better defined that mistake should not occur again. Or has the client successfully negotiated prices below the actual level of servicing required?

Part of the issue of doing your homework is to realize that conventional MIS systems that most printers use to compile their job cost summaries do not include period or timing costs. Overtime premiums or filler characteristics are not included in standard job costing. For example, clients who cannot maintain agreed upon schedules invariably seem to come in on Thursday forcing perhaps unexpected weekend overtime for either their own jobs or other jobs. These innocent bystanders only error was by circumstance to be in the wrong department at the time the crisis hit. On the other extreme some clients allow a little extra flexibility in their schedules which almost allow them to behave, at least in certain departments, as filler jobs. This positive impact on profits is not recorded in any job cost summary but should be tagged somehow.

To return to our disruptive, though significant volume 'lower 20%,' it is much too easy to assume that their "contribution value to overhead and profit" is significant enough to overlook the bottom line fact - they are below break even. Acknowledging considerable sales effort in getting volume to this 'substantial' level, the point remains that valuable capacity in critical centers is being absorbed by this unsuccessful relationship. For example, the best and most conscientious customer service rep(s) is no doubt assigned to this demanding client(s). Is there ever an exception to the fact that the most unprofitable clients invariable seem to be some of the most demanding ones?

One of NAPL Management Plus Award winners said that he never asks an unprofitable client to leave. He simply raises the price to reflect the extraordinary level of service being demanded and provided.

If the abusive client chooses to leave for a cheaper printer, first there is relief among the operations staff that no longer have to deal with the unnecessary stress. Second, there is a sense among the operations group that top management is acknowledging "our best efforts and backing us up in placing a value on the unusual service we have been providing." And finally, it is truly amazing the number of these former clients who come back after a couple of years because they were not able to get the level of professional TLC that they have become accustomed to at your firm. While they may argue to come back at the lower prices (keep in mind that they have always been good buyers of print!), precedent has already been set for servicing premium justification. A good salesman response might be, "After a year's experience with your new and more professional staff, if our profitability is above our targeted 10% then we can look closely at adjusting prices for future work."

Before buying a new press or investing in the significant capacity expansion of any firm, this 80-20 ranking analysis needs to be performed on every firm that amounts to at least 2% of gross revenues. The expansion investment must benefit these most profitable clients. And they need to be told that the investment is being made "to further solidify our relationship."

On the other extreme if raising the prices on unprofitable clients results in their choosing to leave, that might in fact create the needed capacity for the firm to continue to grow. At the very least it may open up enough capacity and delay the timing of the investment by perhaps a year or more. One of the ways to get Return on Investment up is to keep "I" down rather than get "R" up.

The 80-20 rule can and should be used in acknowledging the strengths and correcting the weaknesses of different departments. How about the sales person whose volume may not the highest but whose client base is the most profitable? This is nearly always the direct result of the sales person successfully selling value pricing, negotiating realistic specifications, and managing practical expectations.

For a medium-sized commercial printer in South Carolina one of the five MAC operators was clearly producing 40% of the total work load. The others were not new trainees or substandard operators. This one operator truly was superb. While she made it very clear that she was as happy with her career at this printer as they were with her, she gave the firm an eight month's notice of her resignation when she learned of her first pregnancy. It was clear that family took priority over career for she and her husband. Under the value system and philosophy of protecting their strengths, the firm responded by offering her as much maternity leave as she would like or moving the firm's MAC into the operator's home with a telecommunications hook up at the company's expense. Any amount of time at all that she could find to compliment her motherhood duties would be acceptable to the company. While this was not necessarily in violation of corporate personnel policy, new policies were drafted to accommodate key employees.

How often has the comment been heard, "I wish we had a dozen more like Acme Publishing (the most profitable client) or John or Susie (the most productive employee in a department)? Perhaps one or two more do exist. What similar characteristics of the winner is shared by one or more other large growing client(s) or other employee? Can they be managed, molded, and cloned into the "best" model?

Visionary leaders seem to have three common management reactions to the profile shown by the bell curve analysis. First, they personally learn about the winners to protect and grow that strength. Second, they identify characteristics that allow the firm to manage select members of the middle ground into this "best" top 20%. Finally, they quickly and emphatically identify the worst 20%. If they are unprofitable clients, they narrow specifications, add discipline to schedules, and/or increase prices. For less than productive employees they counsel, train, and move to more appropriate responsibilities.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.