“The good-to-great companies did not focus principally on what to do to become great; they focused equally on what NOT to do and what to stop doing.”
– Jim Collins, US business consultant and author (born 1958) in “Good to Great”
The Pareto Principle also known as “the 80-20 rule” or “the law of the vital few” simply stipulates that, in many cases, a minority of causes generates a majority of the effects. Representing your key business data in a simple Pareto Chart and identifying the “vital few” will help you to define the areas where to primarily focus (or not) the time and resources of your organization.
Download a one-page executive summary here (PDF or JPEG format): The 80-20 Rule (Pareto Principle) for tactical decision making
Vilfredo Pareto (1848 – 1923) was an Italian civil engineer, economist and sociologist who had great interest in studying various social distributions such as income and land ownership. After collecting and compiling a large number of data, he has noticed that 80% of the land in Italy was owned by 20% of the population. As Pareto studied other domains, he observed that the same non-linear distribution pattern was persistently reproduced.
This pattern, where a minority of the inputs is responsible of the majority of the outputs, was later called the “Pareto Principle” or “80-20 rule” and has been since then broadly observed in different domains. Note that, in reality, the distribution can obviously be different from a 80-20 joint ratio (As a matter of fact, following Pareto’s initial discovery and conclusion, those figures are commonly used to explain the principle itself).
The minority of the inputs leading to the majority of the results is called the “vital few”, as opposed to the “trivial many”.
In the graph below, also called Pareto Chart, you will see for example the number of client complaints related to a specific product, sorted per decreasing number of complaints, (left-hand side Y-axis) and the cumulative percentage of complaints per product (right-hand side Y-axis). What Pareto principle tells us here is simply that, in order to solve 80% of the client complaints, you need to fix your quality issues with Products A to I also called the “vital few”. Investing your time and resource on improving the quality of the “many trivial”, ie Products J to T, will only reduce the client complaints by 20%…
It is then clear that Pareto principle becomes a simple but nonetheless powerful tool to support your investment decisions (resources, money, time, energy…): focus on the “vital few” and ignore the “many trivial” (that can be eliminated, delegated, postponed till further notice depending on the type of decision you are involved with).
Note though, that it is recommended to use this principle only when a large number of categories and observations data are available. Besides, interpreting the data under a Pareto prism must not prevent you from running a deeper analysis of the situation. What if Product L of the above chart is a strategic product for your company in the coming years whereas Product B is becoming obsolete? Focusing on improving the quality of the “vital few” products will for sure help increasing your client satisfaction on the short-term but what about your mid/long-term investment strategy? Shouldn’t you start now with resources working on enhancing Product L as well?
- case 1 – in a Service Desk management role: how does the Pareto distribution of the incidents raised per customer look like? On which “vital few” customers will you focus first to reduce drastically the number of complaints?
- case 2 – in a Sales or Business management function: draw the Pareto Chart of your organization profit generated per customer. Who are the customers that you will NOT put under a dedicated relationship management program aimed at reinforcing retention in a first stage?
- case 3 – in a Quality Assurance management position: What are the functionalities of your software used 80% of the time by your users? What can you deduct for your QA resources allocation and test automation initiative?
Defining the relevant long-term investment strategy for your organization usually requires an exhaustive, time-consuming analysis and interpretation of a large set of data. Nevertheless, for a short-term tactical allocation of your resources, interpreting your key data under the Pareto principle turns to be an efficient method to set quickly your priorities: identify and focus your effort on the “vital few” items/tasks that will give the majority of the results and disregard the “many trivial” others!
Last Revision: 2015 March 28