Pareto's Law

From: http://home.alltel.net/mikeric/Misc/Pareto.htm

In the late 1800s, economist and avid gardener Vilfredo Pareto established that 80% of the land in Italy was owned by 20% of the population. While gardening he later observed that 20% of the peapods in his garden yielded 80% of the peas that were harvested. And thus was born a theory that has stood the test of time and scrutiny. The Pareto Principle or the 80:20 Rule has proven its validity in a number of other areas.

In the business work, it has been found that the principle could be applied to many areas, such as:

Applied to Meetings: 80% of decisions come from 20% of meeting time.

Applied to Managerial Headaches: Roughly 80% of your managerial problems and headaches are caused by just 20% of your problems.

Applied to time management and your daily To-Do List: 80% of your measurable results and progress will come from just 20% of the items on your daily To-Do list. The major problem is that most people are so busy fighting fires that they never get around to the most vital few activities that will lead to the greatest results.

Applied to Interruptions: 80% of a Manager's interruptions come from the same 20% of people.

Applied to product defects: Roughly 20% of the input errors typically cause the lion's share of defects.

Applied to Salespeople: Roughly 20% of a sales force will develop 80% of the annual results.

Applied to Customer Complaints: Roughly 80% of customer complaints are about the same 20% of your projects, products or services.

Applied to Business Units: Roughly 20% of a company's business units will produce 80% of the annual revenue.

Applied to Advertising: Roughly 20% of your advertising will produce 80% of your campaign's results. If businesses could only determine which 20% of their advertising was really working, U.S. businesses could save literally billions in advertising costs each year.

Applied to Cleaning: Only 20% time and effort will get 80% clean

Early last century, M. O. Lorenz and Vilfredo Pareto were studying distribution theory. Lorenz found that a large percentage of crime was committed by a small percentage of the total population. A few of the crooks were responsible for most of the crime.

Pareto, an economist, found that a large percentage of wealth was concentrated in a small proportion of the entire population. From this, Pareto advanced the theory of logarithmic law of wealth distribution, or what has come to be called the Pareto principle.

Joseph Juran uses the phrase "Pareto Principle" as a way of describing any misdistribution, particularly quality. Simply put, a few account for most. Juran calls this, the separation of the vital few from the trivial many.

More commonly, this principle has been called the 80/20 rule. From your own experience, you probably sense that 80% of the money at your church or synagogue is given by 20% of the people or that in your department, 80% of what really counts gets done by 20% of the people, take or give a few. The actual count may be 65/35 or 83/17 or some combination but the greater the population in the data the close to 80/20 the ratio will be.

Use of the Pareto Principle or "Pareto Thinking" should be come a way of life. Employment of the Pareto Principle improves problem-solving efficiency greatly. Rather than wasting time, energies and money on efforts to correct everything, the experienced problem-solver will focus his attention only on those few variables, which are shown to account for most of the problem.

An increased ability to separate the essential from the non-essential will improve with practice, especially if that practice involves use of the actual data and not just "eye-balling" the situation. Once established this approach becomes a normal reaction to solving problems. In time an experienced "Pareto thinker" can even make quick, accurate judgment calls without taking the time to get the data.

Frequently when confronted with solving a major problem, people seem overwhelmed with the complexity of the issue, the number of variables involved in the problem; often they are paralyzed, unable to take any meaningful action. Without using "Pareto Thinking" the task of making improvement in any process or solving any significant problem is extremely difficult and at the very least usually appears to require much more time and work than one can afford.

Mike Holt’s Comment: People ask me all of the time, “Mike, how do you get so much done in your life?” As some of you might know, I’m a nationally competitive Barefoot Water-skier, I race ½ Scale NASCAR cars, I produce lots of training material, time to manage my company, as well as time to send you this email. Naturally I have time to spend time with the wife and kids. I accomplish all of this because I am always aware of the 20% of my actions that give me 80% of the results.

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