Pareto Squared a.k.a. The Corbin Corollary

The other day I was having breakfast with David Corbin of Dynamic Concepts Development and he used an interesting model to describe his target market.  David does enterprise software development projects.  Given that most enterprises have internal IT capability, you’d think it would be tough to get a foot in the door, but David has a unique niche based on an extension of the time-honored Pareto Principle.

As he puts it, 80% of the enterprise development work can be handled in house with existing resources.  Of the remaining 20%, 80% can be accomplished through modest extension of existing capabilities (e.g. training).  The remaining 20% (of the original 20%) involves complexity that requires breadth/depth of skills beyond the in-house capability or reasonable extensions thereof.  Hence his niche of opportunity. He calls it the critical “4%” (20% of 20%, or Pareto Squared).

What This Means For Your Business

I think David’s onto something here, beyond solving nasty enterprise software problems.  The rules apply to the enterprise as a whole.  If you want to be “innovative”, if you’re looking for “disruption”, if you want to break ahead of the pack, you need to be looking hard at the 4%.

It brings to mind what I call The Big Lie of Economics.  To get around the organic complexity of life, economists often present their theories and guidance with the caveat of “all other things being equal”.  But all other things are never equal.  In fact it is within those inequalities that the core of competitive advantage lies, the basis for disruption hides, and the seeds of economic catastrophes are planted.  It’s stuff worth paying attention to.

Competitive Advantage

If you’ve Continuously Improved, Six Sigma’d and gone Lean, congratulations!  By the way, so have all your competitors.  You’re a member of a club of highly efficient, smooth running, largely indistinguishable businesses.

Now what.

If you really want to stand out, you have to be standing where no-one else is.  That means paying attention to details that others write off as inconsequential.  It’s about driving the user experience in areas where the user doesn’t consciously realize the experience – it just feels better.  It’s about domain expertise trumping focus groups.  For that you need to wander into the weeds with eyes and ears wide open.  It’s a very special skill, and it needs to be a core competency of your organization.

Disruption

Where does disruption come from, anyway?   If you’re diligently watching and benchmarking your competitors, you’re tracking evolution not spotting revolution.  You need to broaden your field of view.  The problem is that the inverse of carefully bounded business focus is an infinitely unbounded universe.  How do you wrap your head around that?

Well, you don’t.

What you do is understand the individual core elements of your value proposition. Then take each, one by one, and use that was a viewport into other verticals, even way outside your industry, that are affected by the same or similar element.  That’s because disruption happens when someone solves a different problem and inadvertently renders any number of your core elements as irrelevant.

It takes a unique perspective to spot these trends. It takes experience in  a number of verticals.  It’s the skill of seeing patterns where others see noise.  It’s looking hard at the “4%”.

Catastrophic Events

A while back I read “The Misbehavior Of Markets” by Benoit Mandelbrot and Richard Hudson.  Mandelbrot, of course, is the the father of Fractal Geometry – a.k.a. the Theory of Roughness in Nature.  In this book the point is made, through historical example, that very small perturbations in markets have resulted in catastrophic results and that these can actually be understood mathematically.  It’s not exactly a ‘light read’ but it’s an extreme case validator of the need to pay attention to the “4%”.

The Devil Really Is In The Details  

A case study from my own experience involved a small enterprise with IT problems centered on budget unpredictability and “bedside manner” with staff.  The client asked for advice and support in hiring a CTO and building a team that would support scaling of the institution.  Both the problem definition and proposed corrective action were typical of traditional methods.  However, by investigating the details it became clear that only one small part of the overall service offering was problematic for both issues and that an alternative (and more scalable) model was possible.  The result was a direct hire at the contributor level rather than an additional senior executive, combine with outsourcing services. In addition, in searching for the candidate we framed the search in terms of “4%” factors, rather than the usual skills laundry list, we were able to find a true diamond in the rough.

Interesting stuff happens in the tails of the Bell Curve.  To math geeks this may all sound like application of Power Law or Fractals, but for everyone else, it’s Pareto.  Squared.  Thanks David.

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