Pareto Principle - 80/20 Rule

We’ve nearly all heard of the Pareto Principle, or at least the 80/20 Rule. It’s named after Vilfredo Pareto (1848 – 1923) who originally observed that 80% of the land in Italy was owned by 20% of the population. Today’s meaning of the term, “80% of the benefit is generated by 20% of our actions” is attributed to a business consultant by the name of Joseph Juran (1904 –2008) and out of respect for Pareto, he called his concept the Pareto Principle.

Examples

The Pareto Principle is best described via some real world examples:

• 80% of your complaints are generated by 20% of your clients.
• 80% of your profit comes from 20% of your clients. (sadly they’re seldom the same 20%)
• 80% of any project is completed during 20% of the time scheduled for the project. The last 20% always take much much longer…
• 80% of the work in your organization is delivered by 20% of your employees.

Application to time management

I first encountered Pareto’s Law in University and it immediately became the foundation of my time management strategy. The 80/20 Rule, if we embrace it at any level, forces us to continually ask the simplest of questions, “Of all the tasks we could be doing? Where should we best spend our time – if our goal is to reap as much benefit as possible from our limited resources?” This doesn’t sound like much of a strategy – it sounds too much like ‘common sense’. It’s not complicated – it’s not expensive! Of how much value could this possibly be? It turns out that this is the central question supporting any effort to manage any resource. Where do we best spend our resources?

Accuracy

But then there’s the question, how accurate is this 80/20 Rule? Is it really true that 80% of your sales/value come from 20% of your products/services? The immediate answer is no, Sometimes it might be a mere 1% that generates 80% of the benefit, other times the disparity is less pronounced, it might require 50% of your actions to generate a majority, say 80%, of the benefit. What is true in the vast majority of cases, is there are nearly always some actions generating more of their ‘fair share’ of the outcome or result. That’s what Pareto brings to the party. Tasks differ in value.

The beauty of the Pareto Principle is that it suggests (strongly!) there will always be a disparity in results, that our tasks are not created equal – some are far more worthy of our attention than others.

Getting rid of low yielding 80%?

One of the dangers of Pareto is that it tempts us with a certain strategy. Should we get rid of the low yielding 80% of our product line/actions and concentrate our efforts on the Golden 20%? And then if THAT works… then perhaps we should apply that logic once again? Finding the ‘80%’ of the remaining 20% and stop doing those!

Sadly, there’s no definitive response to this strategy. Sometimes it does make a lot of sense to throw out the actions/products that generate far less than our most profitable actions/products, and sometimes it doesn’t. Should Apple stop selling anything except the iPhone and the iPad? That doesn’t sound like the best strategy. Just as some of our daily tasks don’t deliver anything of value directly, they support our other activities. Some judgment is called for.

Applying the 80/20 rule

Applying Pareto repeatedly to any set of tasks can get a tad silly. As much as writing this column on a monthly basis IS one of the more important tasks on my plate – it would be ludicrous to spend ALL my time on this one task. Yet, if this column is important – then paying it a little more attention than some other todo items makes sense. Is the report to senior management that you have due next week important? Is it more important than taking the sales call from the vendor who’s been beating on your door for the past month? If so? Pareto suggests to us where to focus our attention.

It is possible to apply Pareto in a rigorous robotic fashion. It doesn’t take much effort to erect a meticulous framework of value assessments around all our tasks, and perhaps even our people, and take an axe to everything and everyone at the bottom. CEO Jack Welch of GE fame used to fire the bottom 10% of his managers each year. A practice followed by some and criticized by others – this author included.

A less bureaucratic way to make use of Pareto is to simply remember that just because we have seventy-eleven dozen things on our plate this week – doesn’t mean that we have to give each one equally billing, or even pay attention to all of them. There’s a potion of our workload – perhaps only 20% of it accord to Juran and Pareto – that deserve special attention.

Why is this important? Because today none of us have the time to give equally to all the things we could be doing, and finding some logical way to sift the chaff from the wheat has become a necessity.

Parteo’s Principle, like many other ‘rules’, “Measure twice, cut once”, “Once bitten, twice shy”, “Do unto others…” is merely a distillation of an observation. Not everything is equal. Pay attention to what’s working better.

Related Best Practices

• Time Management Tools

Other Resources

• More in depth history on Wikipedia on Pareto Principle
• David Lavinsky writes at Forbes Magazine about Pareto Principle, Pareto Principle: How To Use It To Dramatically Grow Your Business
• Bryan Eisenberg writes at ClickZ about Pareto Principle, "The Pareto Principle: Applying the 80/20 Rule to Your Business" focused on application to E-business

Author

The author of this article is Peter de Jager.

Peter de Jager is a speaker, writer and consultant on the issues relating to the Rational Assimilation of the Future. He has published hundreds of articles on topics ranging from problem solving, creativity and change to the impact of technology on areas such as privacy, security and business. His articles have appeared in The Washington Post, The Wall Street Journal, The Futurist and Scientific American.

A list of his publications can be found online. Peter also conducts webinars for a more in depth understanding of his information.

You can contact him at pdejager@technobility.com and visit his archive of presentations at www.vimeo.com/technobility

(c) 2006 Peter de Jager