The 80/20 rule in project & resource planning
The 80/20 rule, also known as the "Pareto principle", asserts that 80% of all outcomes are a result of 20% of the effort. Everyone knows about the example where 80% of all sales are a result of 20% of the customer base. Thus, by giving more attention to a small group of customers this leads to disproportionate revenue. In this blog post we'll look at how to use the principle within the 80/20 in regards to project & resource planning.
In this blog post we will deal with service providers who work project based and where 'hours' is the primary asset used. The idea is that we can analyse which hours provide for a large contribution and which lead to less contribution or are even wasteful. We can then take that into account with our planning. Before we analyse some concrete examples, we must first consider some principles of the 80/20 rule.
Staying focused and preventing waste
The 80/20 rule states that there is a disparity between effort and results. By determining which components causes this disparity, we can focus more on those components that produce the most and the components that contribute the least. The figure below shows the imbalance within the 80/20 rule.
The beauty of the 80/20 rule is that you can continue to apply it, because within the 20% there is also a disparity. So in the example of the most valuable customers: 4% (20% of 20%) of the customers account for 64% (80% of 80%) of sales. If we pass it again, you will see that less than 1% of all customers provide 50% of the revenue.
This shows that if you continue to focus on the imbalance, you quickly realise that a handful of customers make up half of the revenue. By recruiting more of these types of customers or increasing your existing sales with these customers, you will double the turnover in the shortest period of time, with relatively little effort compared to the other customers.
Avoid complexity, not volume
It therefore seems that you can get a lot more results with a lot of fewer customers. Should we then say those other 80% of customers are not good to have? No, that's too short sighted. You need to investigate why these customers contribute so little. Sure, you have annoying customers who take disproportionate amount of time, but often the reason for this lies in the complexity of your services, because complexity takes time and time is money.
If you sell services that require additional services or custom work, then that additional revenue might seem to be more of the same, but that's not the case. Additional services and customisation usually lead to additional costs that are not always visible. Therefore, make sure you can serve more customers without additional complexity. That always leads to the lowest cost.
Application in project & resource planning
- The 80/20 rule really applies to everything, such as:
- sales efforts
- customer support requests
- productivity of employees
- customer system failures
- return on services
- delays in projects
- budget overruns
- costs of external employees
- and much more...
The main question is: what do you want to achieve? Increase your sales? Minimise support tickets and phone calls? Increase profitability per employee? This is the question that you should answer first. First, establish a goal and then you can focus your 80/20 analysis on that. Below are just a few examples of analyses that favour the project & resource planning.
In the example, we always talked about sales per customer, but actually this does not say so much. You can get a good customer turnover, but low returns, because the margin on projects is bad. This may be because the customer has negotiated hard, but also by exceeding the number of budgeted hours. For projects based on fixed price, this directly affects the margin.
We first make an 80/20 analysis on all projects to see which customers have the lowest margin. That does not mean that we should say goodbye to these customers. A low margin project may have come about with a minimum hourly spend. Therefore, it is wise to do another analysis, namely on projects with significant overruns in the budgeted hours. Here too, they are not directly 'bad' projects, they can still have a good margin.
By combining these analyses, as shown in the figure above, we get a more nuanced view of the situation. Customers who appear in both domains are good candidates to "fire" as a customer. The hours spent on these customers are now available to spend on your customers and projects that contribute most to the margin. This makes the project & resource planning much more effective.
Find out who your "Super Heroes" are
With the 80/20 rule we can also determine who the most effective employees are. If we define effectiveness as the actual hours worked within the scheduled hours, an effective employee is an employee with a ratio that is =<1.
If you have 50 employees, then you have 10 employees who are very effective in performing the work within the scheduled hours. Of these 10, there are two more employees who are head over their shoulders. It's good to know who these 'Super Heroes' are and consciously assign them to projects.
Let's say you plan a project knowing in advance that the margins are tight. Or a project that suddenly struggles with many issues. Then it might be smart to use a "Super Hero" on these projects. In any case, it's never a good idea to use them for easy projects or projects where a good margin is expected.
Each service provider has certain standard activities, which occur in many projects. By analysing the margins on these activities you can also get an idea of which activities have a bad contribution. That does not mean that you have to stop offering those activities because they can be important in the overall proposition to a customer. But you could choose to outsource them.
By outsourcing these less valuable activities, you create more space in your resource planning. You do not need to plan any capacity for these activities, as you will rely on external resources from now on. The available capacity can then be used more for the activities that make a major contribution to the margin or you can even decide to shrink your staff.
The 80/20 rule exposes powerful relationships, that you want to use to your own benefit. To create as many as possible results, in as few hours as possible. That is, in my opinion, effective project & resource planning. In my examples, you see that I have worked a lot with the premise that there should be a contribution to the margin, but that does not necessarily need to apply for your company. There, every company makes its own choice.
Do not take the 80/20 ratio too literally. It's just a reference point and the real relationship is sometimes more proportional or disproportionate than 80/20. From your analysis, a ratio of 65/35 or 90/10 can also be expected. It is about the principle that the majority of the result comes from, a relatively much smaller part of the effort, and thus closer to 80/20 than near 50/50.
Fixed price projects
The examples in this blog should take into account the price agreements with the customer (time material or fixed price). With time material you run a little less risk of depleting your margin if you exceed the budgeted hours. On the other hand, you must really have a good reason for budget overruns. The customer will not simply accept an additional cost and will have you account for it based on the initial hourly budget.
KISS - Keep It Simple Stupid
The 20% that performs well, of course, comes with the grace of the remaining 80% which is poor. Relatively too much time is spent here. To prevent waste, it is important to keep your services and project activities simple. Research also shows that 'simplicity' is a feature distinguishing successful from less successful companies. Successful companies sell a smaller product range to fewer customers and have a simple organisation.
Questions or comments regarding this blog? Contact Timewax.