Pareto Principle or the 80/20 Rule
In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country. Pareto observed that 20% of the people owned 80% of the nation's wealth. He could not know it, but in time that rule would be found to apply with uncanny accuracy to many situations and be useful in many disciplines, including the study of business productivity.
Expanding the Definition
In the late 1940s, Dr. Joseph M. Juran—a product quality guru of that era—attributed the 80/20 Rule to Pareto and called it the Pareto Principle or Pareto Law. The Principle may not have become a household term, but the 80/20 rule is certainly cited to this day to describe economic inequity.
It also is a useful tool to help you prioritize and manage the work in your life.
Juran took Pareto's principle further, applying the 80/20 rule to quality studies. For example, he theorized that 20% of the defects cause 80% of the problems in most products.
Today, project managers know that 20% of the work consumes 80% of the time and resources. That 20% is made up of the first 10% and the last 10% of the project.
Other examples you may have encountered include:
- 80% of a company's revenues are generated by 20% of its customers
- 80% of complaints come from 20% of customers
- 80% of quality issues impact 20% of a company's products
As the opposite rule:
- 20% of investors provide 80% of funding
- 20% of employees use 80% of all sick days
- 20% of a blog's posts generate 80% of its traffic
There are a nearly unlimited number of examples that we tend to apply the 80/20 rule to in our personal and working lives.
Most of the time, we are referencing Pareto's Rule without applying rigorous mathematical analysis to the situation. We generalize about this 80/20 metric, but even with the sloppy math, the ratio is uncannily accurate in our world.
Using the 80/20 Rule to Help Productivity
There are several ways that the 80/20 rule can be used to enhance your own productivity or that of your business. First, if you look closely at the items on your “To Do” list, chances are only a few are tied to important issues. While it may be satisfying to cross off a large number of the smaller issues, the 80/20 rule suggests you focus on the few more important items that will generate the most significant results. The list might not grow much shorter, but you will be practicing effective prioritization.
Next, in assessing risks for an upcoming project, you'll find that not every risk carries equal significance. Select the risks that pose the highest potential for damage and focus your monitoring and risk planning activities on them. Don’t ignore the others, just distribute your efforts proportionately.
20% of the Customers
Earlier we mentioned that company revenues come from a small portion of the total customer base. Focus on the 20% of your customers that make up the bulk of your revenues and invest your time in understanding, identifying, and qualifying similar customers.
Regularly evaluate the 80% of your customers that generate 20% of your business and identify opportunities to shed them for customers that drive better results. Some managers and firms actively cull their customer listings every few years, effectively firing the bottom performing customers.
Look for the 80/20 rule in your customer service. If 20% of your products are creating 80% of your complaints, do some root cause analysis to identify the quality issues there. Focus on any documentation issues, and take corrective action as needed.
Pareto Use to Evaluate Workloads
Entrepreneurs and independent professionals can use the 80/20 rule to evaluate their workloads. They might find that a disproportionate amount of their time is spent on trivial activities such as administrative work that can be easily and inexpensively outsourced.
When evaluating your mid-year progress on your goals, focus on the few that are most critical to your development or success. As in that task list, not all duties and goals are created equally.
Practical Limits to the 80/20 Rule:
The 80/20 rule has many applications in our work and personal lives, but there are minefields here, too.
If you're a manager, don't focus on the 20% of top performers on your team at the expense of the other 80%. You are responsible for increasing the number of top performers, not just assessing and potentially eliminating those who are poor performers.
As an investor, you might think the 80/20 rule suggests reducing your investment diversification. You might make adjustments to your portfolio if only 20% of your investments are driving 80% of the results but pay careful attention to your overall portfolio mix.
Pareto’s principle is a useful construct when analyzing efforts and outcomes. It is valuable when applied to lists of tasks or goals. It can provide a useful framework for addressing many problems. Use it liberally, but don’t forget that 20% of anything is not an insignificant amount.