The Rule of the Vital Few
pareto’s principle [The Rule of the Vital Few]
The 80-20 rule, pareto’s law, or pareto theory..
The Pareto Principle, or ’80-20 Rule’ (among other variant names) is surely one of the simplest and most powerful management tools on the planet.
It’s a remarkably quick easy way to assess, understand, and optimise virtually any situation involving distribution or usage of some kind.
The potential uses therefore cover most aspects of work, business, organizational development and personal life.
Pareto’s Principle is named after Vilfredo Pareto (1848-1923), an Italian economist-sociologist, Professor of Political Economy at Lausanne, Switzerland, who first discovered and described the ’80:20′ effect.
Technically ’80:20′ is most correct numerical presentation of the rule because this is the usual format for expressing a ratio in mathematics, although not even a statistical purist would insist on this in a Pareto context.
It is helpful in specialised quality management such as six sigma, planning, decision-making, and general performance management.
Pareto theory is also an extremely helpful reference or ‘check’ in business/organizational planning and project management too.
Leadership is a lot easier and effective when Pareto principles are kept in mind, and this applies to every form of leadership theory and approach.
The Pareto principle is extremely helpful in bringing swift and easy clarity to complex situations and problems, especially when deciding where to focus effort and resources.
Pareto’s Law is dramatically effective when applied to selling and marketing situations – because it encourages a focus of activity and energy that usually produces very fast and substantial improvements (for example when applied to target audiences, existing customers, product ranges, pricing, etc., and other major ‘profit levers’). Really, it’s impossible to overstate the effectiveness of the theory in these areas, despite which the use of Pareto theory in sales and marketing is commonly overlooked completely.
Pareto’s 80-20 theory extends particularly to time management – in work, business, organizational management, and certainly personal time management outside of work too.
The Pareto Principle (at a simple level) suggests that where two related data sets or groups exist (typically cause and effect, or input and output), for example:
“80 percent of output is produced by 20 percent of input”
“80 percent of outcomes are from 20 percent of causes”
“80 percent of contribution comes from 20 percent of the potential contribution available”
There is no single definitive Pareto ‘quote’ or definition – the above are examples of simple interpretations of Pareto’s 80-20 Rule, for which a very wide range of similar alternatives could be used instead, depending on the situation, including inversions, for example:
“20 percent of clothes in a wardrobe are worn 80 percent of the time”
“20 percent of the tools in a toolbox are used in 80 percent of tasks”
“20 percent of the energy use in a household will offer 80% of the potential energy savings”
The Pareto Principle is an extremely useful model or theory with endless applications – in management, social study and demographics, all types of distribution analysis, business and financial planning and evaluation, and also for organizing your work and life.
For example, household energy savings can be dramatic and easy if you identify the 20% of energy use which offers 80% of the potential savings available. Just as DIY can be made more efficient if the 20% of tools that are used for 80% of tasks are organized to be the most accessible in the toolbox, or the 20% of clothes worn 80% of the time are are organized to be most accessible in the wardrobe…
In fact the Pareto Principle does not demand that the 80:20 ratio applies to every situation, and neither is the model based on a ratio in which the two figures must add up to 100.
So the examples used here are not statistical facts; the 80-20 ratio is used to show that the Pareto distribution principle can be applied to many different situations.
Often the optimal ratio (in terms of identifying the smallest proportion that will produce the greatest improvement) is closer to 90:10, or even 99:1.
Also, the numbers in the ration do not have to add up to 100. The two numbers in an optimal ratio may total more than 100 or less than 100.
For example a situation can exist where 99% of the result is produced by 15% of the factors, or where 75% of the results derive from 5% of the factors.
Here are some examples of different ways to use it. There are very many more.
1. Sales/Selling example
Sales-people and selling organizations usually approach potential customers with different offerings. These offerings probably have different rates of success. But typically sellers do not understand these variances, and may use the different offerings in an arbitrary or random or instinctive way, when Pareto theory suggests that the use of these offerings can be optimized according to which offering produces the best results.
Likelihood: 80% of your new customers result from 20% of your offerings. (It may not be exactly 80-20; it might be 70-20, or 90-15, or a similar big-small ratio.)
Therefore, sellers will improve their results if they:
Identify which offering(s) produces most new customers, and
Then use the identified most-effective offerings more often (and use the less-effective offerings less often, or not at all).
Of course to do the necessary analysis the seller must record the offering which each new customer responded to (which sellers should arguably be doing anyway).
2. Major accounts selling example
Most selling organizations have a few large customers which represent a disproportionately large percentage of total sales.
Likelihood: 80% of your sales revenues probably come from 20% of your customers. (Often this is even more of an extreme ratio, like 90-10 or 90-5.)
It is important to understand this for several reasons:
The more extreme the ratio, then the more at risk the overall business is. Where such a situation exists it is important to realise this – so as to protect the major customer(s), and to work towards altering the ratio by gaining new customers, so that the business dependence on one or a very few customers is reduced. (The expression “having all your eggs in one basket” refers to the risk of dropping that one vital basket and losing all your eggs – which in this case alludes to losing a very big major customer which represents a vast amount of business and jeopardizing the entire organization.)
Every business needs to take extra special care of its major customers, especially when the ‘Pareto ratio’ is extreme and organizational viability and survival rely on just one or very few large customers.
3. Streamlining, downsizing, rationalizing, decluttering anything – reducing range, commitments, materials, ‘stuff’, etc
Most organizations and personal lives contain a far greater range of activities, possessions, products, services, suppliers, etc., than is necessary for actual effectiveness, viability, comfort, etc.
Organizations and people tend to expand activities, materials, and stuff of all sorts, over time, and all of this ‘stuff’ and obligations become expensive and cumbersome to keep, especially where there are related costs of maintenance, registrations, training, monitoring, administrating, etc. The same applies in personal lives.
The likelihood is that 80% of organizational viability/profit/effectiveness, etc., is derived from just 20% of each departmental range (product range, stock, services, etc.)
And the same probably applies in many people’s personal lives.
Analysing these distribution ratios is the first step to streamlining, downsizing, rationalizing, decluttering, etc.
Often the findings of even a quick approximate analysis of one aspect of obligations or holdings (for example stock, suppliers, possessions, etc), will immediately reveal remarkable opportunities to dramatically reduce range/obligations/holdings, with hardly any negative effects, but with massive positive benefits (for example cost-savings, space saving, and greatly decreased related obligations).
In business organizations there are commonly huge cost-savings to be achieved by rationalizing product ranges according to Pareto theory.
And in personal life there are usually vast space-savings to be made from using the same Pareto principles to declutter wardrobes, shoe-racks, bookshelves, kitchen cupboards, etc.
4. General situations of excess which need reducing, or where increased focus is necessary
Pareto theory applies logic to increase effectiveness/efficiency for any situation where there is too much of anything – in business, organizations, work, personal life and anything else.
Often in such situations nothing changes – the situation is allowed to persist due to inertia (see Nudge theory) and because the apparent size of the task is daunting, so people don’t know where or how to begin.
Pareto theory offers a quick easy way to see clearly what must be retained, and what is unnecessary.
So when confronted with any situation requiring rationalization, streamlining, greater focus, etc., use these steps:
Identify the 20% that is vital (and which probably enables at least 80% of productivity, performance, effectiveness, etc).
This is your starting point. Retain this 20%, and nothing else, unless it serves a crucial purpose.
Test effectiveness and implications of the reduced range/holding.
Refer to aspects of change management and project management as appropriate.
Note that 20% is a guide. The actual percentage which represents optimal effectiveness/necessity depends on the situation, and on other considerations, which must be factored into the thinking.
And additionally in organizational Pareto-based change:
Ensure proper consultation happens.
Communicate and explain clearly to all affected.
Devise/agree a transitionary stage to enable a safe change, for example consider forms of storage or archiving of the ‘unnecessary’ items to be discarded or discontinued, etc., just in case they are needed for emergencies.
Ensure adequate warning and leeway is offered so that people affected by the change can make alternative arrangements.
Offer and explain alternatives for options no longer available.
Source: Business Balls