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Understanding the Pareto Principle (The 80/20

Rule)

What is pareto principle


A principle, named after economist Vilfredo Pareto, that specifies an
unequal relationship between inputs and outputs. The principle states that, for
many phenomena, 20% of invested input is responsible for 80% of the results
obtained.
Pareto Analysis is a simple technique for prioritizing possible changes by
identifying the problems that will be resolved by making these changes. By using
this approach, you can prioritize the individual changes that will most improve
the situation. Pareto Analysis uses the Pareto Principle also known as the
"80/20 Rule" which is the idea that 20% of causes generate 80% of results.
With this tool, we're trying to find the 20% of work that will generate 80% of the
results that doing all of the work would deliver. Note: The figures 80 and 20 are
illustrative the Pareto Principle illustrates the lack of symmetry that often
appears between work put in and results achieved. For example, 13% of work
could generate 87% of returns. Or 70% of problems could be resolved by dealing
with 30% of the causes.

What is the 80% rule ?


The Pareto principle (also known as the 8020 rule, the law of the
vital few, and the principle of factor sparsity) states that, for many events,
roughly 80% of the effects come from 20% of the causes.

Originally, the Pareto Principle referred to the observation that 80%


of Italys wealth belonged to only 20% of the population.
More generally, the Pareto Principle is the observation (not law) that most
things in life are not distributed evenly. It can mean all of the
following things:

20% of
20% of
20% of
20% of
20% of
And on

the input creates 80% of the result


the workers produce 80% of the result
the customers create 80% of the revenue
the bugs cause 80% of the crashes
the features cause 80% of the usage
and on

But be careful when using this idea! First, theres a common


misconception that the numbers 20 and 80 must add to 100 they dont!
20% of the workers could create 10% of the result. Or 50%. Or 80%. Or
99%, or even 100%. Think about it in a group of 100 workers, 20 could
do all the work while the other 80 goof off. In that case, 20% of the
workers did 100% of the work. Remember that the 80/20 rule is a rough
guide about typical distributions.
Also recognize that the numbers dont have to be 20% and 80%
exactly. The key point is that most things in life (effort, reward,
output) are not distributed evenly some contribute more than
others.

Life Isnt Fair


What does it mean when we say things arent distributed evenly?
The key point is that each unit of work (or time) doesnt contribute the
same amount.
In a perfect world, every employee would contribute the same
amount, every bug would be equally important, every feature would be
equally loved by users. Planning would be so easy.
But that isnt always the case:

The 80/20 rule


observes that most
things have an unequal
distribution. Out of 5
things, perhaps 1 will
be cool. That cool
thing/idea/person will
result in majority of the
impact of the group
(the green line). Wed
like life to be like the
red line, where every
piece
contributes
equally,
but
that
doesnt
always
happen.
Of course, this
ratio can change. It
could be 80/20, 90/10, or 90/20 (remember, the numbers dont have to
add to 100!).
The key point is that most things are not 1/1, where each unit of
input (effort, time, labor) contributes exactly the same amount of
output.
So Why Is This Useful?
The Pareto Principle helps you realize that the majority of results
come from a minority of inputs. Knowing this, if
20% of workers contribute 80% of results: Focus on rewarding these
employees.
20% of bugs contribute 80% of crashes: Focus on fixing these bugs
first.
20% of customers contribute 80% of revenue: Focus on satisfying
these customers.
The examples go on. The point is to realize that you can often focus
your effort on the 20% that makes a difference, instead of the 80% that
doesnt add much.

In economics terms, there is diminishing marginal benefit. This is


related to the law of diminishing returns: each additional hour of effort,
each extra worker is adding less oomph to the final result. By the end,
you are spending lots of time on the minor details.

1:06 (level 1) wireframe

2:00 (level 2) basic coloring

3:05 (level 3) beginning details : rims, windshiled

4:04 (level 4) advanced details : shading, reflections

5:05

(level

5)

finishin

touches

headlights,

background
Now, lets say the artist was creating potential designs for a client.
Given 5 minutes of time, he could present:

A single car at top quality (Level 5)


A reasonably detailed car (Level 3) and a colorized wireframe (Level
2)
5 cars at a wireframe level (5 Level 1s)
But Level 5 is way better than Level 1! someone will inevitably shout.

The point isnt that Level 5 is better than Level 1 it clearly is. The
question is whether a single Level 5 is better than five Level 1s, or some
other combination.
Lets say your customer doesnt know whether they want a car, a truck,
or a boat, let alone the color. Spending the time to create a Level 5
drawing wouldnt make sense show some concepts, get a general
direction, and then work out the details.
The point is to put in the amount of effort needed to get the most bang
for your buck its usually in the first 20% (or 10%, or 30% the exact
amount can vary). In the planning stage, it may be better to get 5 fast
prototypes rather than 1 polished product.
In this example, after 1 minute (20% of the time) we have a great
understanding of what the final outcome will be. Most of the work is
done up front, in the sense of deciding the type of vehicle, body style, and
perspective. The rest is filling in details like colors and shading.
This isnt to say the details are easy theyre not but each detail
does not add as much to the picture as the broad strokes in the beginning.
The difference between #4 and #5 is not as great as #1 and #2, or better
yet, a blank drawing and #1 (the time from 0:00 to 1:06). You really have
to look to see the differences on the car between #4 and #5, while the
contribution #1 makes is quite obvious.
Concluding Thoughts
This may not be the best strategy in every case. The point of the
Pareto principle is torecognize that most things in life are not distributed
evenly. Make decisions on allocating time, resources and effort based on
this:

Instead of spending 1 hour drafting a paper/blog post youre not


sure is needed, spend 10 minutes thinking of ideas. Then spend 50
minutes writing about the best one.
Instead of agonizing 3 hours on a single design, make 6 layouts (30
minutes each) and pick your favorite.
Rather than spending 3 hours to read 3 articles in depth, spend 5
minutes glancing through 12 articles (1 hour) and then spend an
hour each on the two best ones (2 hours).
These techniques may or may not make sense the point is to
realize you have the option to focus on the important 20%.
Lastly, dont think the Pareto Principle means only do 80% of the
work needed. It may be true that 80% of a bridge is built in the first 20%

of the time, but you still need the rest of the bridge in order for it to work.
It may be true that 80% of the Mona Lisa was painted in the first 20% of
the time, but it wouldnt be the masterpiece it is without all the
details.The Pareto Principle is an observation, not a law of nature.
When you are seeking top quality, you need all 100%. When you are
trying to optimize your bang for the buck, focusing on the critical 20% is a
time-saver. See what activities generate the most results and give them
your appropriate attention.
How to Use the Tool
Step 1: Identify and List Problems First, write a list of all of the problems
that you need to resolve. Where possible, talk to clients and team members to
get their input, and draw on surveys, helpdesk logs and suchlike, where these
are available.
Step 2: Identify the Root Cause of Each Problem For each problem,
identify its fundamental cause. (Techniques such as Brainstorming, the 5 Whys,
Cause and Effect Analysis, and Root Cause Analysis will help with this.)
Step 3: Score Problems Now you need to score each problem. The scoring
method you use depends on the sort of problem you're trying to solve. For
example, if you're trying to improve profits, you might score problems on the
basis of how much they are costing you. Alternatively, if you're trying to improve
customer satisfaction, you might score them on the basis of the number of
complaints eliminated by solving the problem.
Step 4: Group Problems Together By Root Cause Next, group problems
together by cause. For example, if three of your problems are caused by lack of
staff, put these in the same group
Step 5: Add up the Scores for Each Group You can now add up the scores
for each cause group. The group with the top score is your highest priority, and
the group with the lowest score is your lowest priority.
Step 6: Take Action Now you need to deal with the causes of your problems,
dealing with your top-priority problem or group of problems first. Keep in mind
that low scoring problems may not be worth bothering with; solving these
problems may cost you more than the solutions are worth. Note: While this
approach is great for identifying the most important root cause to deal with, it
doesn't take into account the cost of doing so. Where costs are significant, you'll
need to use techniques such as Cost/Benefit Analysis, and use IRRs and NPVs to
determine which changes you should implement.
Pareto Analysis Example
Jack has taken over a failing service center, with a host of problems that need
resolving. His objective is to increase overall customer satisfaction. He decides to
score each problem by the number of complaints that the center has received for

each one. (In the table below, the second column shows the problems he has
listed in step 1 above, the third column shows the underlying causes identified in
step 2, and the fourth column shows the number of complaints about each
column identified in step 3.)

Jack then groups problems together (steps 4 and 5). He scores each group by the
number of complaints, and orders the list as follows:
1. Lack of training (items 5 and 6) 51 complaints.
2. Too few service center staff (items 1 and 42) 21 complaints
3. Poor organization and preparation (items 3 and 4) 6 complaints.

As you can see from figure 1 above, Jack will get the biggest benefits by
providing staff with more training. Once this is done, it may be worth looking at
increasing the number of staff in the call center. It's possible, however, that this

won't be necessary: the number of complaints may decline, and training should
help people to be more productive.
By carrying out a Pareto Analysis, Jack is able to focus on training as an issue,
rather than spreading his effort over training, taking on new staff members, and
possibly installing a new computer system to help engineers be more prepared.
Key Points:
Pareto Analysis is a simple technique for prioritizing problem-solving work so
that the first piece of work you do resolved the greatest number of problems. It's
based on the Pareto Principle (also known as the 80/20 Rule) the idea that 80%
of problems may be caused by as few as 20% of causes.
To use Pareto Analysis, identify and list problems and their causes. Then score
each problem and group them together by their cause. Then add up the score for
each group. Finally, work on finding a solution to the cause of the problems in
group with the highest score.

Pareto Analysis not only shows you the most important problem to solve, it
also gives you a score showing how severe the problem is.