Pareto’s Law
Posted on February 4, 2010
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Pareto’s Law
Pareto’s Law or Pareto’s Principle is known by several names 80/20 Rule, Pareto Theory along with Pareto’s Law or Pareto’s Principle. There is no definite Pareto “quote”, but it is a model or theory that has endless applications. The theory has proved its results in management, social study and demographics, business and financial planning and in all types of distribution analysis.
The principle is extremely helpful in bringing swift and easy clarity to complex situations and problems, especially when deciding the priority where to focus efforts and resources. The Pareto principle says that where two related data sets or groups exists (typically in the pair of cause and effect or input or output):
“80% of output is produced by 20% of input”
Or
“80% of outcomes are from 20% of causes”
The principle does not say that it can be applicable to every situation. It is not the rule that when two figures 80 and 20 are added should result into 100.
This principle is extremely useful in planning, analysis, trouble-shooting, problem-solving and decision-making, and change management, where it is required to take broad initial judgments, and especially when propositions need checking. The instigators had thought to refer Pareto’s Principle as a “sanity check”, many complex business disasters could easily have been averted. Pareto’s Law is a tremendously powerful model, more effective because it’s so simple and easy.
To apply this principle, take the 80% time-consumers and see how you can halve the time; then ask, is that exercise is worth in cost terms, and where will it lead? If you get a positive answer, repeat the exercise three times. You’re now using only 6% of the previous time span, which is massive 16-fold improvement. Now ask whether making these changes will significantly reduce costs or raise customer satisfaction (if not both). If the answer is Yes – well, do it!
Pareto Principle will generally work within any given scenario or system or organization:
- 80 percent of results come from 20 percent of efforts
- 80 percent of activity will require 20 percent of resources
- 80 percent of the difficulty in achieving something lies in 20 percent of the challenge
- 80 percent of revenue comes from 20 percent of customers
- 80 percent of problems come from 20 percent of causes
- 80 percent of profit comes from 20 percent of the product range
- 80 percent of complaints come from 20 percent of customers
- 80 percent of corporate pollution comes from 20 percent of corporations
- 80 percent of road accidents are caused by 20 percent of drivers
