Question:
I purchased your Look Over My Shoulder® program and find it really helps me a lot to prepare for my case interviews. However, listening to all the cases I stumbled upon an inconsistency that confuses me a bit.
In the one of the cases the candidate X’s out “Cost” as an area to look for more profits. The reason for this is that costs did not rise and can’t therefore explain the drop in profitability.
However, in the other cases the candidate does go deeper into costs to look for opportunities to increase profits, while costs per se are not the main cause of the drop in profitability.
To truly master the 80/20 rule, what are the criteria for deciding to enter a branch or not?
My Reply:
To start for those unfamiliar with it, the 80/20 rule (which you really should Google) basically says 20% of the causes to a problem drive 80% of the outcome.
So 20% of the richest people in the world, control 80% of the world’s wealth.
20% of your sales people drive, 80% of sales.
20% of your clients, drive 80% of your net income, etc…
This rule and one’s ability to use in a practical setting is one of the differentiators between those who are successful in case interviews vs. those who aren’t.
“To truly master the 80/20 rule, what are the criteria for deciding to enter a branch or not?”
This is an excellent question and you are the first person to ask it in such a specific context.
The answer is very important, but it is also very subtle or nuanced.
There is an advanced concept in case interviews that many consultants call “sizing”. It’s an important tool. I personally use it implicitly all the time as do other McKinsey consultants and alumni.
Basically the idea is you estimate the potential impact of a change in a business to see if it’s even worth pursuing.
So to use an extreme example, if the goal is to improve profits by $10M and currently sales are $8M and costs are $4M, then using a “sizing” exercise we know that if we cut costs to $0 (unrealistic) it still doesn’t solve the entire problem of coming up with a total of $10M in additional profits.
Or even if we cut costs by a more realistic 25% (not easy to do by the way), that only comes up with an additional $1M in profits… leaving 90% of the $10M goal unaccounted for.
So one way to apply the 80/20 rule is to actually do the math in these situations. Often candidates that are “not quantitative enough” (a very common piece of feedback you’ll hear from interviewers) fail to do this kind of sizing often enough.
If a case follows the pattern of the client’s business “used to be great, but now it is not”– Generally speaking, you want to figure out the root cause (business jargon for primary cause) of the problem.
So in the first case you mention, the conclusion was profits are down a lot, but costs remain unchanged…. so therefore something must have happened recently to revenue to cause the change in profits.
In these situations, even if you improve costs, you still haven’t figured out the root cause behind the client’s problems.
And unless you solve the root cause issue, focusing on costs is a Band-Aid solution (more jargon for temporary solution, like apply a band-aid bandage for someone with a broken leg, it may make them feel better but it doesn’t actually fix the problem)… and therefore is not worth focusing on.
But, this assumes that solving the root case problem is sufficient to accomplish the goal.
In the second case reference by the person who ask the question, the candidate does explore costs even though costs were not the primary cause of the “problem”.
So why does it make sense to do that in some cases but not others?
It comes back to sizing.
If you solve the primary cause and you do a sizing estimate to figure out its impact, if it’s not enough or the difficulty level is too extreme, then you might be forced to look at secondary opportunities — in this example, costs.
So if the goal is $10M more in profit, the company has $20M in sales, $10M in costs, but already has 66% market share and is unable to enter any new markets, even if the client gets 100% market share, gets sales to $30M assuming 50% margins, only produces another $5M in profit.
It’s not enough.
So in this case, you’re forced to look at the cost side to “close the gap” (another phrase consultants use a lot) to reach the goal.
The lack of sizing was very common amongst some of the people I interviewed for my Look Over My Shoulder® Program.
You’ll notice me references this “bad habit” on multiple occasions in my commentary in that program.
Also in that program, there are a few instances where I do a “re-enactment” of what the candidate should have done instead, and in hindsight I did make a mistake in my re-enactment. Instead of doing the sizing exercise out loud for everyone to hear, on a few occasions I did do it silently in my head without explaining out loud why I did it.
This is not best practice. You should absolutely do this out loud so others can follow.
In an interview and when speaking to a client in person, you want to do all sizing exercises out loud. You’ll hear the phrase “back of the envelope estimate” — which is the term often used by consultants to describe this sizing exercise.
(Also when working with clients, many who are not as fast at math as you are, you want to do it in writing on a white board and go through the math extra slowly — not in an insulting way, but slow enough so they can follow without having to ask you to slow down… which makes them feel dumb.)
By the way, the reason estimation questions were invented in interviews is because as consultants we use them all the time in Real Life.
It is not an invention created for the sole purpose of torturing candidates.
It was something invented by clients to “torture” consultants! (Kidding, of course)
Most candidates under-utilize sizing / estimations within the context of a business case. And if you do use it, it is important you use it out loud to determine whether or not a particular branch of a case is worth pursuing.
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