Everyone I talk to seems to have their own conception of what the 80/20 Rule is all about, but very few people in the retail automotive business fully understand its dominant principles and how they should be applied to our business. Nonetheless, I’m a believer that the 80/20 Rule can and should be used by every sensible person in their daily life. The successful utilization of this principle can multiply the profitability of auto dealerships and the effectiveness of any department or individual.

The 80/20 Rule, also known as the Pareto Principle, was named after an Italian economist, Vilfredo Pareto, who is said to have observed in 1906 that 80% of the land in Italy was owned by 20% of the population. He also observed that 20% of the pea pods in his garden contained 80% of the peas. In general, this principle has been interpreted to describe the imbalance of input and output, sources and effects, and effort and results. Here are a few examples of how the 80/20 Rule has been applied to the car business:

• 80% of the work is done by 20% of our employees

• 80% of our complaints come from 20% of our customers

• 80% of what we buy comes from 20% of our vendors

You have probably heard a lot more examples. The 80/20 Rule is intended to mean that in anything the few (for example, the 20%) are vital and the many (for example, the 80%) are trivial. And it would therefore follow that we should focus our efforts on the vital, rather than the trivial--that we should focus on the few (the 20%) that matter. But we need to be careful in a couple of areas.

First, we need to make sure we don’t get hung up in the numbers. There’s a common misconception that the numbers (for example, the “80” and the “20”) must add to 100--they don’t! They are just examples of uneven balances. The fact that they add up to 100 is just a coincidence. 40% of your techs might produce 75% of your hours, 15% of your expense accounts may represent 60% of your expense, and 25% of your sales department OTDBs might produce 65% of your gross! The key point is that each unit of input (effort, time, labor) is not distributed evenly--some contribute more output than others.

Next, we need to recognize that the Pareto Principle is an observation, not a law of nature. It does not mean doing only 80% of the work needed. Building a relationship with the customer may result in 80% of the deal’s success, but it wouldn’t be an approved deal without the rest of the details. When you’re seeking quality, you need all 100%. When you are trying to optimize your bang for the buck, you must focus on the 20% to save time.

Finally, we need to beware of superstar management. Just because 40% of our sales staff produces 70% of our gross doesn’t mean we should focus on managing only the 40%. Helping the good become better is a better use of our time than helping the great becomes terrific.

So what should we do? Try to identify the key 10%, 20%, or 40% of inputs that are creating most of our results. Find ways to emphasize those key percentages. That’s why NCM’s most successful client-dealers are dedicated to high-payoff activities (HPAs). Most dealership leaders today have easy access to dramatic improvements in profitability by focusing on HPAs and eliminating, ignoring, automating, delegating or retraining the remaining activities, as appropriate.