One of the applications from The 4 Hour Workweek by Tim Ferriss is to do a regular 80/20 analysis (Chapter 5: The End of Time Management).
According to Pareto’s principle, 80% of results come from 20% of the efforts. In business-speak, 80% of your income comes from 20% of your clients. The ratio can vary slightly, such as 90/10, 95/5, or even 99/1, but you get the idea. In his book, Tim Ferriss shares his personal story of how he realized that he was spending 95% of his time pursuing those clients who weren’t placing orders (95% of his customers), while his bulk of his income came from steady, low-maintenance clients who simply placed orders without bothering him (3% of his customers). By choosing to stop expending energy on those people who only ordered occasionally (and even “firing” the two customers who gave him the most grief), he was able to go from working 80 hours a week to 15! (This worked for him because he had a product business model, where most of his time was spent on sales calls and customer support.)
The personal application derived from this principle is to look at your income and determine your 80/20 ratio — which of the small percentage (20% or so) of clients, pursuits, or projects are contributing to your income. You can also determine whether or not most of your energy is being expended on the other 80% and make decisions to divert your energies and efforts. Finally, you can analyze the common factors between the 20% and pursue more projects/clients/etc. that fit those commonalities.
So, this past weekend, I created a few reports in Quicken and some spreadsheets to perform my own 80/20 analysis.
In Quicken, I printed out two reports:
- Year-to-date report of Itemized Payees. I collapsed the “Expenses” and “Transfers” sections so that only the income “payees” were listed. This report showed all the places where we received income in 2007 — including bank interest income, Steve’s paycheck, but also my individual clients.
- The same report with a customized date to include numbers from 2006 (1/1/2006 – current date).
I also created reports to find my total business income for year-to-date and my customized date.
Now for the analysis:
- On my itemized payee reports, I ignored all non-business payees (as this report includes ALL sources of income).
- For each business payee, I took the amount * 100 / total business income to find the percentage of income for that time period. The way Quicken exports reports to Excel- or spreadsheet-ready formats was a bit too detailed for me, so I calculated percentages the old-fashioned way with a calculator. (I used my old high school/college Texas Instruments scientific calculator, which allowed me to store my total business income as a variable so that I didn’t have to keep retyping it.) I wrote these percentages down on my printout.
- I quickly typed the list of payees and percentages into a spreadsheet.
- Column 1: Payee name
- Column 2: Percentage – last 22 months (since 1/1/2006)
- Column 3: Percentage – last 10 months (since 1/1/2007)
- Adding another column (Column 4), I made some notes about clients that were most likely one-time — i.e., I made their web site and that was the end of it. I also noted the projects that I had especially enjoyed working on and the projects that were especially stressful to work on.
- I added another column (Column 5) to jot down some notes about who these clients were, using common keywords:
- referred by family – client was referred by family member (or IS a family member)
- referred by friend – client was referred by friend
- referred by writing – client was referred by my blog or other articles
- developer – client is mainly a developer who came to me for visual design work
- middleman – client is a design house or similar middleman contracting me for their own client work
- small biz – client came to me for work related to their small business
- frequent updates – client comes to me for web site maintenance at least once a month
I made a few copies of the worksheet:
- Sorted by 22-month percentage – This shows me the top clients for the past 22 months.
- Sorted by 10-month percentage – This shows me the top clients for the past 10 months.
- Projected 10-month percentage – I readjusted some of my numbers; as they were based on pure cash flow, I hadn’t taken into account some of the invoices that were going to be due.
What did I find?
- 80% of my income came from “middlemen” — companies or design houses that have their own clients and contract me for design and/or production work. (This includes work that I do for PixelMill, my main contract, and also includes royalties that I’ve received from products, so the number isn’t exactly accurate but I didn’t feel like figuring out the breakdown between royalties and work-payment. Maybe later.)
- 5% (22 month)/10% (10 month projected) came from a one-time writing project.
- 15% (22 month)/10% (10 month projected) — came from miscellaneous projects for small businesses, non-profits, and people referred by family or friends. About 2.5% of this comes from two businesses who need regular updates; the rest were pretty much one-time projects.
- There were 3/23 miscellaneous one-time projects that were a joy to work on; my two regular update clients are also very positive relationships. 3/23 were extremely stressful. The others had their highs and lows. While I don’t have specific numbers, I know from experience that these clients required more hand-holding and communication overall.
Some observations and thoughts:
- My “middleman” work and developer work has generally been enjoyable and positive and provides about 80% of my income.
- I think a big part of this is because they can appreciate my skills and express their appreciation, which makes me feel good. For example, I’ve been called a “CSS wizardess” by one and complimented on my “inhuman speed” by another.
- These relationships generally require less foundation work; I don’t need to convince them of my skills, I don’t need to hand-hold them through the basic concepts of having a web site, I can use industry terms without explaining them.
- These relationships do generate more interruptions, however, either with emails, IM, or phone calls to talk about projects.
- The main downside of middleman work is that it’s often not very creative work; I’m either working on a small part of a project or doing HTML/CSS production work.
- Bottom line: Based on pure numbers, I should continue to work with these companies and be open to working in similar situations. However, these are mainly hourly-contracted jobs. Am I working myself into a situation where my income is purely dependent on how many hours I work? I want to recommit to producing more products where I make a royalty and also consider raising my hourly rate for new clients to take into account my main strength of speed and efficiency.
- While I enjoy the end product of my one-time web projects, the process of wooing the client, educating the client, probing the client for useful feedback, discussing things with the client, etc., etc., can be exhausting.
- With a few exceptions, the most exhausting projects were with small businesses looking for their first web site.
- A big part of the process with the clients was developing trust. The projects that I did for friends, family, or those referred by friends/family generally went much quicker.
- I like the relationship-developing aspect of working with clients: learning about their personalities, learning how to communicate with them, and getting a little more personal despite having a “business” relationship.
- There are a couple clients who take up a lot of communication time — very wordy on the phone, requiring in-person meetings, etc.
- Bottom line: I really do enjoy the client process and the final product, but I’m sensing that I’m starting to burn out in this area — and again, based on numbers, it’s not “worth” my time to continue to pursue this type of work. I’m going to set some boundaries for myself so that I’m only working with a certain number of custom clients at a time. I think this will be better overall as I can then really focus on the one or two that I work with and develop the one-on-one relationship that I enjoy. So, one of my immediate goals is to complete and close out as many of my open projects as I can.
- A big chunk of income this year was from a one-time writing project.
- I really enjoyed this project, and not just because it paid me a lot.
- This was an opportunity that fell in my lap; I didn’t go looking for it. The person that found me, however, had read other related articles that I had written and thought it would be a good fit.
- Bottom line: Continue writing and look into other opportunities for paid writing.
- Other action items:
- I will have to rework my web site content. Right now corriehaffly.com is very targeted at small business owners, from my home page “why hire a designer” content to my educational “what goes into a web site” content to my portfolio pieces. If I want to work more with developers and middlemen, I should redo my web site to reflect the services and skills that I can offer.
- I will figure out my royalties to see what the actual percentage is. This will help me to decide how much more time I should invest in creating digital products or looking into more writing opportunities.
- Finally, I’ll think more about applying other principles from The 4 Hour Workweek about cutting down interruptions and time is spent on communications so that I can be more productive.
Overall, this has been a very valuable exercise! It only took about 10 minutes to print out the reports, calculate the percentages, and create the initial spreadsheet data, and another 20 minutes to sort the data and jot down notes. I did more analysis while writing up this blog which took quite a bit longer, but your analysis process could probably be more efficient than mine. If you have a spare half-hour or hour, I’d highly recommend that you follow Tim’s advice to perform an 80/20 analysis.
This is my first full post with thoughts about The 4 Hour Workweek. View other posts related to The 4 Hour Workweek.