The XBox 360 and other devices division (think Zune, etc.) is hemorrhaging money and just had to take another $1 Billion charge due to extensive hardware problems with the XBox. You’ll love this: "… the Xbox 360 return problem was getting so severe that the company was running out of ‘coffins,’ or special return-shipping boxes Microsoft provides to gamers with dead consoles."

That’s on top of the fact that no one cares about their Zune MP3 player and iPod "competitor", and that the Nintendo Wii and its disruptive innovation approach is running circles around the XBox and Sony Playstation.

Why am I bothering to highlight this for you? Two reasons: 1) There is a law of complexity that in essence states that complexity in an organization is directly related to its size. 2) Even mighty Microsoft cannot escape the logic of said law, regardless of how much money they throw at a problem.

The ultimate irony of everything that transpired with Microsoft in the Anti-trust domain since circa 1998 is this: Microsoft could have likely benefited a great deal from the break-up into smaller, more tightly focused companies that it fought like a banshee to avoid (and that really only got taken off the table once GWB took the White House). This is because Microsoft has grown well past the 800-pound-gorilla stage, and currently has all of the nimbleness of an aircraft carrier.

You see, entrepreneurship is concerned with what we call "arbitrage", or the assignment – or more often reassignment – of resources to their most efficient, most profitable, highest and best uses. And the law of complexity demands that in order to continually be able to do so, we need to focus on keeping things as simple as possible.

So the only question is, would Microsoft be worth more today if you added together say three or four different, more dynamic offspring companies than in its present configuration? Given the news and products that have come out of Redmond over the last 7 years, the answer is likely yes.

Richard Koch in his seminal work "The 80/20 Principle" has an entire chapter (Chapter 5: "Simple is Beautiful") devoted to complexity and how it relates to 80/20 thinking, which goes beyond what I will repeat here (highly recommended read though).

But to give you only the most key points: 1) Internal complexity is usually hidden but very real nonetheless. 2) It does not negate the benefits of scale (the idea that with scale, the additional cost to e.g. produce one more unit moves closer and closer to zero), but rather it "steals" from scale. 3) Studies have shown that "only one characteristic differentiated the winners from the less successful firms: simplicity." 4) Identify and focus on the most simple 20% of your product design, service delivery, marketing message, sales channel, even customers/clients.

As with the Microsoft case, it’s usually fun to see laws in action…

Just for some light examples: 20% of the carpets in your house will receive 80% of the wear (this is probably the most quoted), 20% of your friends will drink 80% of your booze, 20% of people on Match.com will go on 80% of the dates, and so forth. The imbalance of input to output that the principle predicts holds surprisingly well across pretty much all contexts.

By the way, here is the first important thing to get about the 80/20 rule: The exact ratio of the imbalance could be more or less than 80% to 20%, the point is that there will be a distinct imbalance away from 50/50. Most often it seems to range from about 65/35 up to 95/5, and overall it averages out very conveniently around 80/20.

Richard Koch has written a number of seminal books about it, and if you haven’t at least read his "The 80/20 Principle", you really should get started soon.

More recently, it was brought to people’s attention in Timothy Ferriss’ book "The 4-hour Workweek" during his PR blitz through a number of major internet marketing players’ virtual interview rooms.

Great book by the way, really a must read for anyone dreaming of the vaunted "Internet Lifestyle" (the one where money appears in your bank account on auto-pilot while you sip on fruity drinks with colorful straws and little, even more colorful umbrellas in them lying on a beach in an exclusive resort somewhere).

Now, seriously though, the 80/20 Rule has far reaching applications for how you manage your time, your business, and your life in general, since it basically says that 20% of your activities are producing 80% of the results, profits, joy, etc. And that by extension the other 80% of activities are mostly wasting your time. Heavy, I know.

And the next important thing that you really want to get about it (and very few do, even Koch doesn’t make a clear mention of it as far as I know) is this: The 80/20 Rule is recursive. Hunh? What that means is that you can apply the rule to itself to arrive at further ratios. So for example, if 20% of the 20% of your most valuable customers generate 80% of 80% of all of your profits, then you get about a 64/4 "Rule" – 64% of your profits come from 4% of your customers. Have you identified those and thanked them lately?

As mentioned above the exact ratios are not as important, the often drastic imbalance is. Run the recursion one more time and you get about a rounded 51/1. So we could say that 1% of speakers at a conference provide over half the value. Taking the recent "StomperNet Live" Orlando conference as an example, I would have to say that that would be John Reese in that case.

Maybe one day this will go down in history as the "Schleber 51/1 Rule", not to be confused with the "Schleber 151 Rule" which revolves around a certain New Year’s Eve celebratory punch… :)

Another example where I think the distribution can be proven out very well is on all of the social networking sites: 20% or members create 80% of the activity, 4% or members are creating over half of the activity, and so forth. So if you’re trying to get a forum or membership site off the ground for your business, you better identify that 20% somehow (start with the 1% or 4%). Someone should run the numbers on one of the nascent Web 2.0 sites, I may post a little Perl script to do that sometimes.

So there you have it. Put your thinking cap on and begin investigating the numbers for your own business. Fair warning: This can sometimes be shocking.

I’ll discuss the deeper implications for what I call 80/20 Time Management in a later post. Teaser: Right now you’re likely spending 80% of your time on things that are only getting you 20% of your results. In other words, you’re wasting massive amounts of time… what would happen if you spent all of your time on the 20% activities that are currently getting you 80% of results? Your results would quadruple. Doh!