"Innovate at all costs!" This is the exhortation from innumerable business articles and best-selling business books. These authors describe how to innovate but fail to include how to find the time to innovate. What’s needed is a tool to help find the time to think about and act on innovation. The Law of 90-10 can be used as just such a tool to identify opportunities that, when addressed, create time for innovation.
The Law of 90-10 states that 90% of one statistic is attributable to 10% of another. A familiar example of this phenomenon can be seen in world wealth distribution where 10% of the world’s population commands nearly 90% of the world’s wealth. This can also be seen in most organizations where 10% of its members produce 90% of the results, witness the rainmaker or the star researcher.
When the Law of 90/10 is applied to the revenues and costs in a business, a remarkable disconnect comes to light — revenues and costs are not in the same money stream. In most companies 90% of the sales come from just 10% of the products or customers. The products and sales that make up the 10% generally only consume about 10% of the transactions that take place inside a company. This means that the 90% of all transactions goes to the 90% of all customers and products that deliver just 10% of the sales. Dropping the worst of the customer base or products can free up time for innovation with no real damage to profitability or long term growth.
To start the exercise, executives must think through some basic definitions of the tasks inside a business. For example, a customer service group’s salaries and overhead can be summed and divided by the number of orders processed in a month leaving a cost per customer. A similar approach can be taken for other departments like shipping, accounting, tech service, or sales. For a plant, the labor and facility costs can be summed and divided by the number of batches completed per month to produce a cost per part once variable material costs are rolled in. These are by no means perfect representations of true costs but they provide approximations adequate to determine transaction costs.
Once costs per customer and costs per part are calculated, the next step requires building a table of customer revenues, transaction costs, product margins, resources, leadership, and prospects. The data for the resources column requires a qualitative evaluation — low, medium or high — of the amount of internal resources needed to service the customer. The leadership column is again qualitative and asks if this customer is a leader in their market with the products sold to him. The prospects column requires thinking though if company resources were dedicated to this customer will significant sales, leadership, and profitability result.
This analysis allows for two important actions; first, the creation of time for innovation by easing out customers and products which drain company resources and offer low margins and meager prospects and, second, a strategy for where to focus company resources to enable profitable innovation and growth.
If this kind of analysis and thinking might be beneficial for your business, please contact Greg King or call him at 860.645.0147, Program Manager for the Growth Solutions Initiative at the Massachusetts MEP.
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Matt Edison works as the Reactive Silicones Business Manager for Gelest, a specialty chemical manufacturer. Since 1989, Matt has also worked for DuPont, General Chemical, and Inolex Chemical where his jobs included Plant Manager and Engineering Manager, among others. In his current role, Matt leads business development projects, manages the company’s silicone technology group, and improves the company’s business systems. These duties combine his special interest in aligning resources to realize customer opportunities. Matt lives in Woodbury, New Jersey with his wife Ellen and their four children. He can be reached at [email protected].
