In this article we’re looking at the Pareto Principle (also known as the ’80/20 rule’) – the idea that 20% of causes generate 80% of results. The idea was originally postulated in 1906 by Vilfredo Pareto, an Italian economist and sociologist who recognised that 80% of his country’s wealth belonged to 20% of the population. Pareto realised that this ‘predictable imbalance’ could be further extrapolated; for example 10% of people would have 65% of the wealth, and 5% would own 50% of the wealth. Of course these exact figures are not precisely applicable to every situation, although the underlying general principle of ‘varying ratios of disproportionate distribution’ certainly is. And it is possibly one of the most powerful management tools to have up your sleeve (but only 20% up, of course!)
Recognisable examples of the Pareto Principle in action in everyday working life might include:
- 20% of your team produce 80% of your results
- 20% of clients create 80% of the sales
- 20% of procedures involve 80% of the problems
- 80% of revision happens in the last 20% of available time
- A role that you spend 80% of your time doing, gives you only 20% of your fulfilment
The Pareto Principle has significant commercial implications when applied in professional practice:
- 80% of complaints come from 20% of clients; so concentrate efforts on working with those people and turning them into powerful advocates of the business.
- 80% of turnover comes from 20% of clients; so if you’re introducing a product or service, introduce it to them first. Identify the attributes they have in common and actively target new clients who fit the same criteria.
- 20% of the team are responsible for 80% of sick leave – identify and address the root causes in order to improve individual productivity and boost team morale.
We can also apply the theory to great effect when managing our own time and energy commitments. Pareto Analysis is a simple technique for prioritising possible actions by identifying the problems that will be resolved by making changes. By using this approach you can therefore prioritise the individual changes that will most improve the situation – there are six steps to work through:
- Identify and list issues. The list will be more valuable when you consult others for their input, so ask colleagues and clients for their suggestions (their priorities may well be very different to yours!)
- Identify the root cause of each problem (is it because of a lack of time, resources, training etc.)
- Score or rank the issues. How you choose to do this will depend on the nature of the problem – for example, if it’s financial you’ll want to allocate the highest score to the areas that are costing you the most, or have the greatest potential for generating income when addressed.
- Group issues together by root cause – if five issues on the list relate to a negative impact on the customer experience, collate them together.
- Total the scores for each group – the group with the highest score should be your highest priority as solving the underlying issue will generate the best return.
- Work down the list, bearing in mind that areas you have rated as low priorities may not even actually ‘need’ tackling.
Whilst the Pareto Principle is a great tool for managers and decision makers, it also works brilliantly for less tangible considerations such as goals and personal objectives. Listing out all the things you want to achieve can seem daunting, but by allocating high scores to those that are most important to your happiness and sense of fulfilment, you can choose to focus on this key 20% first. Conversely, by letting go of the transient 80% of ‘stuff’ that can easily take over, you’ll feel more fulfilled, be more in control and achieve more tangible success.
There’s lots more interesting background on the history and application of the Pareto Principle at www.businessballs.com/pareto-principle-80-20-rule
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