It means that 80 percent of your outcomes come from 20 percent of your inputs.
This principle was introduced by a management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, whose observation was that 80% of income in Italy was received by 20% of the Italian population. The assumption is basically us that the most of the results in any situation are determined by a small number of causes.
Pareto was an important philosopher and economist. Legend has it that one day he noticed that 20% of the pea plants in his garden produced 80% of the healthy pea pods. This observation helped him to think about the uneven distribution. When he thought about the wealth he discovered that 80% of the land in Italy was owned by just 20% of the population. By further investigation of different industries, he found that 80% of production typically came from just 20% of the companies. Thus the generalisation became:
80% of results will come from just 20% of the action.
As Pareto demonstrated with his research this ‘rule’ holds true, though in a very rough sense, to an 80/20 ratio, however in many cases there are chances that ratio can be a lot higher – 99/1 may be closer to reality.
There are many economic conditions, for example, the distribution of the wealth and resources on planet Earth, where a small percentage of the population holds the largest chunk, this clearly demonstrates the 80/20 Rule. There are business examples also such as 20 percent of the employees are responsible for 80 percent of a company’s output or 20 percent of the customers are responsible for 80 percent of the revenue or 80 percent of complaints come from 20% of our customers. These are not hard and fast rules and the situation may not be same in every company or every time. The ratio would not be exactly 80/20, but there are chances if one looks at many key metrics in a business there is definitely a minority creating a majority.
- Entrepreneurs, soloist and independent professionals can evaluate their workload or word schedule and assess whether the majority of their time is spent chasing small value activities that consume time, included administrative work that can easily and inexpensively be outsourced.
- After making a ‘To-Do’ list, scrutinise its items. There are chances that just a few of item are tied to important issues. The 80/20 Rule is easily applicable as we can now prioritise our work and focus on the few, larger items that will generate the most significant results.
- One should regularly evaluate 80% of their customers that generate approximately 20% of their business and identify opportunities to shed those customers for those that drive better results.
- One must not focus on just 20 percent of top performers on your team at the expense of the other 80 percent.
- There are chances that 20 percent of the invested in a project through planning and execution might generate the majority of the results or progress, one cannot afford to ignore the details of the initiative.
Pareto’s principle of 80/20 Rule is a useful construct when analysing our efforts and outcomes from an activity. It is priceless when applied to task or goal lists, and it provides a useful analytical framework for many problem situations. Use it liberally, but do not accept it as an absolute or you are likely to misstep.