Pareto Principle | The 80-20 Rule

The 20/80 rule called the "Pareto principle" makes us realize that 80% of results often occur with only 20% of the effort. So if we correctly identify tasks and prioritize those that produce the most results, performance and organizational performance will increase tenfold.

Definition

Pareto's principle, also called Pareto's law, 80-20 principle or 80-20 law, is an empirical phenomenon found in some domaines : about 80% of the effects are the product of 20% of the causes. Source: Wikipedia The Pareto Principle is not a universal law, but rather an observation. Deviations are therefore possible and acceptable depending on the domains and the sampling performed.

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History

It was in 1906 that the Italian economist Vilfredo Pareto realized, following a statistical study on Italy, that 20% of the population owned 80% of the wealth. In 1960, Joseph M. Juran took up this concept and established its statistical distribution, which he called the "Pareto Principle" and called it the "Pareto Distribution". Juran later acknowledged that the principle was known long before Vilfredo used it, but the name Pareto remained, for lack of an authentic origin.

Why is this important?

Here are some examples of the Pareto Principle⁽¹⁾

20% of the world's population owns 80% of the world's wealth.
20% of items account for 80% of your inventory.
20% of the words you know are enough to express yourself 80% of the time.
80% of customer complaints come from 20% of products and services.
80% of delays come from 20% of possible causes.
20% of your products and services account for 80% of your profits.
20% of defects in a system account for 80% of its problems.

Its usefulness

This principle governs many of our actions and can be used to roughly determine that by putting 20% effort, we can achieve 80% of the result.

In the sales area, it is often realized that 20% of the customers bring in 80% of the revenues. In quality, 20% of the causes produce 80% of the problems. In your inventory, 20% of your products account for 80% of the value. In purchasing, 20% of your suppliers provide 80% of your products.

When resources are limited, and they always are, the Pareto principle allows us to better focus our efforts on actions that have the greatest impact. For example, a representative will focus his efforts on the 20% of his customers who earn 80% of his revenue. An inventory manager will have to pay more attention to the 20% of products that account for 80% of his costs .

And conversely, Pareto makes it possible to identify the actions that give the least results, and therefore those that should not be done in priority. By working on the right things, the ones that give the most results, we can improve the performance of each hour worked, thus ensuring an improvement in organizational performance.

Perfection...hard to achieve

Pareto's principle teaches us that much more effort will be required to deliver fewer and fewer results. Indeed, if we apply the principle, it will take 80% effort to get the last 20% of added value. So a very heavy cost to pay to achieve perfection.

The pursuit of perfection can be uneconomical for an organization. The value added becomes virtually nil in relation to the work done. The organization will then be able to better allocate its resources in order to obtain more value, thus proving the old adage "the more the merrier.

"Perfection is not of this world."

ABC coding, Pareto in everyday life

In order to facilitate the management of sales and products, ABC coding makes it possible to assign to customers, products, suppliers, prospects, etc. an A, B or C code representing its position in the Pareto graph. Thus an "A" is assigned to the top 20% of the elements that give 80% of the results. A "B" is awarded to those who follow and contribute 15% to the results. The others that follow get a "C" to contribute the last 5% of results. Pareto thus becomes part of your business model, which will focus first on the "A" elements, then the "B" and then the "C". The distribution of your management time should be in the same proportions. Thus 80% of your time will be dedicated to the "A's", 15% to the "B's" and 5% to the "C's" to obtain maximum results.

Agile management with Pareto

Project management in Agile mode also takes part of its strength in Pareto distribution. In many projects, 80% of the value added to the project is found in 20% of the project tasks. By prioritizing the tasks that have the most impact, we manage to deliver a lot of value, much faster and with less effort. The Agile management method takes advantage of this distribution of value and, by prioritizing tasks first, allows the project to be completed in a better timeframe and with more quality. The Agile project management technique is mainly used for software development projects, but can easily be used for many other types of projects.

Pareto, just great!

Performance can be defined as "Working effectively on the highest priority things". By using Pareto in all areas of your organization, you ensure that everyone is working on what pays the most for the business on the road to organizational effectiveness. Isn't that great?

N.B. Office Boost is largely inspired by the Pareto principle.

References / Sources