Pareto Principle: Management Funda; Jun'07

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What does it mean
The Pareto Principle also called the 80/20 Rule means that in anything a few (20%) are vital and many (80%) are trivial. For instance roughly 80% of your orders come from 20% of your customers. 80% of decisions come from 20% of meeting time. 80% of customer complaints are about the same 20% of your projects, products or services. You will notice this even in mundane matters like we wear 20% of our most favoured clothes about 80% of the time.

How did it have its origin?
In the late 1800s, economist and avid gardener Vilfredo Pareto established that 20% of the people owned 80% of the wealth. While gardening he observed that 20% of the peapods in his garden yielded 80% of the peas harvested. After Pareto made his observation many others observed similar phenomena. Quality management pioneer, Dr. Joseph Juran in the 1930s recognized a universal principle he called the "vital few and trivial many" which stated that 20% of something is always responsible for 80% of the results.

What are its applications?
The Pareto principle has several applications. Some of them are listed below:-

Are there any limitations to using it
Yes, but we should view it as challenges which need to be addressed rather than limitations. One challenge is to identify which actions make up the useful 20% and that too in advance. The other challenge is to determine whether this useful 20% always contain more or less the same actions or differ in different times.

 How can I use it
So often we say “There is so much to do and so little time” or “What an unproductive day!”  Consistent application of 80/20 rule can help us dramatically improve our productivity.


To maximize personal productivity, realize that 80% of one's time is spent on the “trivial many” activities.  Analyze and identify which activities produce the most value and then shift your focus so that you concentrate on the “vital few” 20%. Similarly to increase department productivity, focus attention on the top 20% of activities or transactions by first identifying and ranking projects and purchases in order of risk and productivity; and then focus remedial activities on those select few. Assign or delegate the 80% “trivial many” to subordinates or reduce them to clerical processes.  Identify that 20% of all transactions which account for the greatest risk and concentrate on minimizing those risks rather than minimizing all risks at much greater time and expense.  To reduce costs, identify which 20% are utilizing 80% of the resources. 


So go ahead and identify that 20% in your work that really matter. Remember they are going produce 80% of your results.

 

References

  1. http://en.wikipedia.org/wiki/Pareto_principle.
  2. Callos, JD, “The Pareto Principle (a.k.a. The 80:20 Rule)”, http://www.4hb.com/08jcparetoprinciple.html.
  3. Savage,A, “How Useful Is the Pareto Principle” http://www.lifehack.org/articles/lifehack/how-useful-is-the-pareto-principle.html.
  4. Reh,FJ,“How the 80/20 rule can help you be more effective”;   http://management.about.com/cs/generalmanagement/a/Pareto081202.htm.
  5. Rain, L, October 2004, “PARETO'S PRINCIPLE”, http://naeb.org/Purchasing_Link/Commentaries/2004/Oct_LR_Commentary.htm.