Understanding the Pareto Principles | How do you use the 80/20 Pareto Rule?
‘Identify the vital few from the trivial many’ – Pareto Principle Definition
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?
Developed originally by Vilfredo Pareto, he identified in Italy in the early 1900s that 80% of the wealth (land) was controlled by 20% of the population. And today, 82% of all wealth is still owned by 20% of the population.
‘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.
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
Now that the data is graphed, you can quickly draw your eyes along the 80% line and identify which activities are taking up 80% of the effort. In this case, these are Internal Meetings, Travel, Internal Emails and Client Facing work.
So if this team member is struggling with time management overall, then they need to focus on 3 core activities.
- They need to evaluate what internal meetings they must attend to allow for more customer-focused work to take place
- 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.
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