The Pareto principle : 80–20 rule

I had an interesting conversation with a colleague the other day about the 80-20 principle. Normally, a very anxious person, always worried about his deliveries, he seemed calm and composed. I asked him jokingly if it was his New Year resolution. He then seriously said that he was trying to apply the 80-20 rule at work, and see if he can manage things in a better way. We talked more on the subject, and I did some further research on this.

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The Pareto principle (also known as the 80–20 rule, the law of the vital few) states that, for many events, roughly 80% of the effects come from 20% of the causes.

Business-management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

The 80/20 Rule means that in anything a few (20 percent) are vital and many(80 percent) are trivial. In Pareto's case it meant 20 percent of the people owned 80 percent of the wealth. In Juran's initial work he identified 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:

• 80% of your output comes from 20% of your effort
• 80% of a company’s profits come from 20% of its customers
• 80% of a company’s turnover comes from 20% of its product line
• 80% of inventory cost comes from 20% of inventory
• 80% of crime is committed by 20% of criminals
• 80% of the world’s wealth is held by 20% of the population
• 80% of your sales is delivered by 20% of your sales force
• 80% of your complaints come from 20% of your customers

The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. Of the things you do during your day, only 20 percent really matter. Those 20 percent produce 80 percent of your results. Identify and focus on those things. If something in the schedule has to slip, if something isn't going to get done, make sure it's not part of that 20 percent. Pareto's Principle, the 80/20 Rule, should serve as a daily reminder to focus 80 percent of your time and energy on the 20 percent of your work that is really important.

Don't just "work smart", work smart on the right things.

Cheers!