The Pareto principle, commonly known as the 80/20 rule, clearly states that about 80% of the effects stem from 20% of the causes. This means that a handful of inputs or factors are accountable for the majority of outcomes.
What is the Pareto principle?
The Pareto principle is one of the simplest ways to improve your business results and your thinking. The Pareto Principle is extremely useful to help us determine which areas to focus our efforts and resources on in order to achieve maximum efficiency.
It simply states that 80% of your results, comes from 20% of your effort. Our 80% of your outcomes come from 20% of the inputs.
In other words, 80% of your sales, will come from 20% of your customers. Or 80% of your overall costs will come from 20% of what you buy. 80% of your time online will come from just 20% of the actions you take online. 80% of new customers will come from 20% of your advertising effort.
The goal of the Pareto approach in problem-solving is to find where we should be focusing our efforts.
Who invented the Pareto Principle?
The 80/20 Rule, also known as the Pareto Principle, is a rule of thumb that states that 80% of the effects come from 20% of the causes. This rule has been found to be true in many different areas of life, including business, economics, and engineering. The benefits of understanding and applying the 80/20 Rule are vast. In this article, we will discuss what the 80/20 Rule is, how it can help you identify the root cause of problems, and some examples where it has been successfully applied.
The 80/20 Rule is named after Italian economist Vilfredo Pareto, who observed in the early 1900s that 80% of the land in Italy was owned by 20% of the population. He also found that 80% of the peas in his garden were produced by 20% of the pea plants. This principle has been found to be true in many other areas as well, including business and economics. In fact, it is often referred to as the “Pareto Principle.”
So what does this have to do with problem-solving? The key is understanding that a small number of causes can often produce a large number of effects. This is important because it means that we can focus our efforts on addressing the root cause of a problem, rather than spending time and energy on symptoms that will not lead to a lasting solution.
‘For many events, roughly 80% of the effects come from 20% of the causes’ – Vilfredo Pareto
Some more examples:
When investing, its been shown that 80% of the returns come from 20% of the investments made. And, unfortunately, on the other side, 80% of the losses come from 20% of investments as well.
Pareto Principle in relation to Time Management
One of the most precious resources we have is our time and many of us struggle with huge to-do lists and what feels like never-ending demands on our time – especially at work.
To understand how to improve our performance and what might be impacting our work performance, we need to understand how we are spending our time. One of the first options is to simply look at how we are spending our time and how well that links to our goals, objectives and what we are trying to achieve.
Here is an example of a front line sales manager who has a small team that they manage. Obviously, the goal of this sales manager is to engage with our existing and new clients and grow the business pipeline for the future.
Step 1 – Collect the data
So over a fairly standard week, we collected how many mins/hours the sales managers time was spending on critical tasks.
|Client Facing Work||8||480|
|New Business Pipeline||4||240|
|Client Facing Meetings||3.5||210|
This is the first stage of the Pareto analysis.
Step 2 – Calculate the percentages
The next stage is now to figure out that 80% rule, so we need to add another couple of column showing the individual activity % plus the overall accumulative %.
|Client Facing Work||8||480||12%||77%|
|New Business Pipeline||4||240||6%||92%|
|Client Facing Meetings||3.5||210||5%||97%|
Step 3 – Graph the data
Pareto Example Time Management
Travel needs to be reviewed and if possible (it might not be) reduced. Internal Emails are once again taking a large percentage of the time. So once again, reviewing what emails are received, why and how to reduce will be critical to release more time for client-facing work and building the business pipeline.
This example is very typical in many organisations. When we discuss lean and creating value, in this instance, the work which adds value is the client-facing work and the development of the business pipeline. We would also add client-facing meetings and even the Team development all add value. But meetings, internal emails and travel do not directly add value to our customers.
The Benefits of the Pareto Principle
The benefits of using the Pareto principle are that it can help identify the root cause of a problem and make better decisions. By breaking down problems into smaller parts, it can be easier to determine what is causing them. This can then lead to more effective solutions. Additionally, the Pareto principle can help prioritize tasks and identify areas where improvements can be made.