The Pareto Principle, also known as the 80/20 rule, is a classic. And these things become so for a reason, as noted management guru Peter Drucker observes “There is nothing quite so useless, as doing with great efficiency, something that should not be done at all”.
The principle states that by and large 20% of the cause produces 80% of the consequence.
This observation was originally the result of Italian economist Pareto noticing in 1906 that 80% of Italy’s land was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.
As he and others later discovered, the principle has a certain universality which can be applied in almost any context. It is a powerful, fundamental principle of life – and of working smart.
So what else can you use Pareto to illustrate?
Well, for example, in business it’s generally true to say that 80% of the results come from 20% of effort, or that the top 20% of your customers will account for 80% of your profit.
Consider applying the 80/20 rule to the information you receive: perhaps 20% is useful, whereas 80% is not. The key to efficiency – and success – is to identify and focus on that 20% and ignore or remove the rest completely; it’s wasted effort.
The same is true of time expended for results achieved. Think of the benefits you could enjoy if you apply the Pareto Principle to your time management and your personal and business productivity.
Typically a business will try to squeeze every last drop out of each opportunity, to go ‘100% all-out’, without consideration of the impact on time, productivity and wastage.
Simple, time-efficient businesses recognise that it is fundamentally inefficient to go for the ‘whole pie’ when you can get the majority of results for the minority of effort.
Safe in the knowledge that your efforts are not going to waste, you can concentrate on what wins you customers – and then enjoy the success.
Most businesses are not brave enough – or innovative enough – to pursue such a strategy, but you can’t argue with the logic.
Concentrate on the 20% that produces the 80% of benefit.
You can look at it another way; spend 80% of your time working on the 20% that really gets you results. In this way you can work more efficiently, ensuring that – to continue the metaphor – you spend 80% of your time servicing that 20% of clients that produce 80% of your profit.
‘You win some, you lose some’ is no way to run a successful business, but armed with knowledge of the Pareto Principle, you can work the system to your benefit. It’s not just about working smarter – it’s about working smarter on the right things that will get you the best results.
To put this on the context of organisational costs, the reality is that most organisations don’t rigorously manage up to 20% of their costs – and those suppliers – more than once every few years. To most businesses, concentrating on that 80% of the costs – typically the costs of goods for resale or the cost of manufacture – makes sense.
It’s where the skills of the procurement team they have – if they have one – lie, and it’s certainly the right approach to focus on the largest costs where you can make the most difference. Letting the other 20% ‘tick over’ becomes an inevitability borne of a lack of time, resource and knowledge.
By focusing on the 80%, the 20% is neglected, and for most organisations 20% of the cost is still a significant sum. Utilising external resource to apply focus to that 20% – typically a range of indirect costs such as IT & Comms, Facilities Management, Fuel, Insurance, Office Supplies, Print & Copiers, Utilities and Waste – can bring tangible benefits.
Article by: Robert Stearn