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Focus on what is profitable

Isn&#39t it ironic that the best advice is often the simplest?

I can&#39t help but agree with what Richard Koch says. Essentially his advice centres around being focussed and analysing every business activity. But all too often business people, including those in senior roles at large organisations, fail to follow the 80/20 principle.

And isn&#39t it also ironic that those in larger organisations invariably have the necessary management data and information to make informed strategic and tactical decisions often but still lack focus?

While some businesses can say that their whole range is profitable it stands to reason that some products will be more so than others. All too often only parts of a business are highly profitable and identifying and exploiting these is key. Having said that, there are good reasons why a company may still want to offer less profitable products or services.

The most obvious is because the profitable products simply cannot be marketed on their own or because the whole product range is complementary and a full service capability is vital. In these situations the less profitable activities should be subcontracted to a third party. After all, one company&#39s thorn could well be another&#39s jewel based on different skill sets and resources.

Koch explains the point very well in his book: “For everything but the most succulent activities you must exploit other firms. They are the carriers of water and hewers of stone. Their role is to do all your heavy lifting.”

So the advice is clear, 80/20 companies must be selective about the activities they undertake and must not be afraid to use other firms to perform peripheral tasks. The challenge, of course, is to find the best firms to perform such tasks at the right price.

While differing skill sets should, in theory, mean that there will always be a relatively small, specialist firm out there that will happily perform your less profitable or unprofitable functions I&#39m not so sure that this is always the case in reality. While the majority of revenues will continue to flow into the coffers of the big corporates I&#39m less sure that profits will. Profits will go to the lean, mean 80/20 firms. Perhaps this is why the vast majority of mortgage brokers and IFAs are one or two-man bands. And perhaps it is also why many larger intermediary firms struggle to make a profit. Specialist markets are no longer the crumbs left by big business for the small players to scratch a living from, they are the ultimate prize.

The realisation of this fact has led many lenders to focus on niche markets. Look at Preferred, London Mortgage Company and Kensington. Having identified niches and developed a relatively limited range of products to satisfy that market, as 80/20 organisations we must serve our target customers better than anyone else. This specialisation enables us to provide a better service than our competitors. And &#39better&#39 means whatever measure the customer values most in a given market: speed, quality, price etc.

I would like to make one final observation on this subject. Individuals too can use the 80/20 principle to exploit their corporations in a perfectly ethical way. If individuals or small teams within a corporation can identify the few profit drivers that account for the majority of profits they can leverage this.

They could either form a new venture together or strike a joint venture deal with their existing employer that focusses on the most profitable niche. The latter option could provide the best of both worlds – a slice of the profits but with the support of an established company.

So, the 80/20 principal is simple yet immensely powerful: Undertake only those activities that provide a relatively high return on your capital and efforts. If an activity results in a low return, don&#39t do it or if you need to do it as part of a package, outsource it.

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