The 80-20 rule, or sometimes called Pareto’s Principle, is not just a tool for statistical analysis. It can be an extremely useful tool to help guide and focus your efforts during the day and help expand your business. Let’s take a look at what the 80-20 rule is and how it can help you improve productivity and profits.
Vilfredo Pareto was an Italian economist who in 1906 noticed the unequal distribution of wealth. He observed that 20 percent of the people owned 80 percent of the wealth in Italy. Dr. Joseph Juran worked in quality management during the 1940s and was a quality management pioneer. Juran knew of Pareto’s work and noticed that 20 percent of something was often responsible for 80 percent of the results. (“Vital few and trivial many.”) This observation of Juran’s become known as Pareto’s Principle and can be a very useful tool to guide and enhance business performance.
The 80-20 rule means that 20 percent of something appears to provide 80 percent of the results. In Juran’s work, this meant that 20 percent of the defects caused 80 percent of the problems. You can apply the 80-20 rule to almost anything. Twenty percent of your customers will tend to provide 80 percent of the revenue. Twenty percent of your product portfolio will provide 80 percent of your sales. Eighty percent of your calls are to 20 percent of the contacts in your rolodex. Eighty percent of your production delays will be caused by 20 percent of the possible factors.
Over the years, I have often referred to the 90-10 rule. As the world changes and we use more and more technology, many areas become even more focused. The big get bigger and as they do you will find even more examples where 10 percent of something provides 90 percent of the results. Regardless of the rule being called the 80-20 or 90-10 rule, the message is the same. Stay focused on what really matters and not the trivial items that waste time and resources.
The clear value of the 80-20 rule is that it can remind us to stay focused on the 20 percent of activities that provide most of the results. If 20 percent of your activities provide 80 percent of the results, from a time management perspective, you should focus on those activities. You could call these activities your high payoff activities, or HPAs. It’s important as a manager to determine what activities are your team’s HPAs and to give them relentless focus. By assuring that these HPA activities get done, you will achieve much greater results. Some areas you could consider is to focus on the 20 percent of the products that drive your sales and assure all customers know about these products. If you know 20 percent of the possible causes of delays result in 80 percent of the delays, focus your operations team on these 20 percent. If the top 10 percent of your customers provide the majority of your revenue, have your sales team find a few more customers like those in the top 10 percent. If 20 percent of your products provide 80 percent of your revenue, considering having your product management team obsolete part of the 80 percent, so you can focus on the 20 percent. Some of this may seem obvious, but as we get busy, it easy for managers to focus resources on too many projects, or the project that seems to make the “most noise” instead of the 20 percent that really matter to results.
Being familiar with the 80-20 rule and applying it to focus on your HPAs is all part of working smarter. By utilizing superior time management skills and efficiently directing resources, you can achieve more than you ever thought possible.