How Useful Is the Pareto Principle?
The Pareto Principle states that 80% of the results from any series of actions are caused by 20% of the actions themselves. In other words, most of the results we get are because of a small minority of our actions. The rest are either wasted or produce little of value. This sounds like a useful observation. However, before you decide the Pareto Principle is true and can be used to guide your actions, I want to ask two important questions.
- Can you identify which actions make up the useful 20%? And can you do so in advance?
- Does this useful 20% always contain more or less the same actions?
Let’s take the first question. It’s easy to feel intuitively that most results arise from a small group of actions. The Pareto Principle feels immediately valid. It also feels like a practical tool. Identify the “magic 20%” of actions and you can more or less dispense with the other 80% without much impact on your results. What a marvelous saving of time and effort.
Of course, this only works if you can reliably distinguish the 20% of actions (or people, or events) that produce that disproportionate amount of benefits. It also assumes every result comes from a single, identifiable action — or at least a small, obviously linked group of them.
But is this true? Don’t some results rely on the interaction of large numbers of events, choices, actions and decisions? Can we know which count and which don’t? What if we dropped some, only to find later they were essential in some way? Maybe they only produce good results in combination? Cutting seemingly unnecessary actions because they don’t obviously fit into the “magic 20%” might turn out to be a poor idea.
The Pareto Principle is perhaps most often applied to sales. Suppose you could reliably identify the 20% of sales calls that produced 80% of the orders you took this week. How much might the success of those calls rely on the market intelligence, knowledge and simple practice you gained by making the other 80%? Could you miss out all the rest, or even a significant number of them? That would include new customers being encouraged to place larger orders, prospects and old customers who might be won back from a competitor.
My second concern is this: is it always the same 20%?
Let’s stick with the sales calls. This week, 20% of your calls produce 80% of your sales. Pareto rules! Next week, you need to sell just as much. Will you visit the same 20% of customers and receive the same orders?
Surely that’s unlikely. They only just placed an order. Most, maybe all, need to use up that order before buying again. Fine. You just need to find another 20%. But how? Everyone else was in the “unproductive” 80% last week? But if Pareto works, at the end of the next week you’ll once again find 80% of orders came from a new 20% of calls.
What’s going on? My guess is the Pareto Principle distinguishes groups you can only find after the event, once you can see what worked and what didn’t. The membership of the “magic 20%” of people or actions shifts each time. Wait long enough and every one will sometime be part of that 20% group.
If that’s so, the Principle is almost worthless as a guide to future action, which is how it’s most often used. There may be some actions or people (20% again? Who knows?) that figure so rarely in the “magic group” they could be removed without loss. There may be some regular members of that group that could be identified and given more focus and investment. Either way, what’s needed is time, careful observation and recording over many occasions, good records and much patience and reflection. None of these are actions or qualities much associated with today’s frenetic organizational pace.
I’m not saying Pareto is wrong. I don’t know. I’m not sure anyone has ever done the lengthy and extensive research needed to find out. I’m merely suggesting it’s neither the universally applicable principle, nor the simple measure, nor the practical guide to decisions we’ve been asked to believe it is for so long.
To sum up:
I think the Pareto Principle has great intuitive attractiveness — which says nothing about whether or not it works, nor how it works (if it does). However, these questions remain unresolved:
- How do you know which 20% is producing the results? Can you even find out at a time when the knowledge might be useful? I suspect you can usually only find the answer — if there is one — after the event. And if that’s so, it leads me to a second question.
- Is it always the same 20%? If it’s not (and I suspect it isn’t), over time maybe the whole 100% will be in that magic 20% group sometime. And if that’s true, the Principle applies only to a specific occasion (if it applies at all).
If any of my concerns is valid, the whole idea becomes worthless as a guide to future action or allocating resources (which is how people try to use it).
Adrian Savage is an Englishman and a retired business executive who lives in Tucson, Arizona. You can read his thoughts most days at The Coyote Within and Slow Leadership, the site for anyone who wants to bring back the fun and satisfaction to management work.
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Comments
Leon says on October 31st, 2005 at 11:47 pm
Wise thoughts, Adrian! I agree on what you said, in some scenarios, 80/20 principle is not working too well. Sales call is definitely the best example - Should one focus on the big companies because they are spending larger chunk of money - or is one making an assumption that focus the efforts you have spent on big companies will get the most output? If I go for smaller companies, will the decision-making process be faster hence there is a better efforts vs output ratio?
What I see though is that 80/20 principle is a good tool to educate people realizing the importance of competing higher priority tasks.
I have been using this sort of example when I talk about 80/20 rules:
“If you have 10 tasks on hand and if 80/20 rules applies, will you go and do first two highest priority tasks to achieve 80% of output, or you are going to do eight lower priority tasks to get 20% of output?”
With this question, there are usually couple of assumptions on prioritization:
- One can prioritize among tasks well
- One can prioritize them correctly
- The differences of time required on those tasks are not big.
Just my thoughts.
Steve Milford says on November 2nd, 2005 at 12:46 am
Pareto’s Rule not only intuitively makes sense but is validated again and again in reality. If you think of a tightly clustered typical bell curve you can quickly see that the majority of the area under the curve contains a minority of values along the horizontal axis.
In manufacturing (and service) operations analysis, a typical variation on the 80/20 rule is known as A-B-C analysis. In the A-B-C analysis the A items are the 5 to 15 percent of whatever (customers, products, etc) that account for 70-75 percent of sales, shipments, (again whatever); B items are the 15-20 percent that account for 15-20 percent of sales or whatever; and the C items are the remaining 60 to 75 percent of customers that account for the last 5-10% of sales (again, or whatever).
The attractiveness and utility of this type of ranking is that it enables quick focus on the two extremes:
For A items: don’t screw up on those 5-15% percent, listen close, protect that territory.
For C items: how can productivity be improved? Upgrade, upsell? Is the cost of maintaining the customer worth it?
It goes upside down when you use it to analyze customer complaints, service calls, product returns, etc. In which case typically 5-10% of problems (bugs, production flaws, documentation ambiguities, whatever) account for 70-80% of service calls, returns, etc.
The groupings are somewhat dependent on how specifically characteristics are grouped — too much specificity and the groupings break down (not enough similarities). It is not unusual, when broad groupings are used, to find groupings within groupings (i.e. an A-B-C cluster within a broad C cluster).
How is it useful in everyday life? Obviously, as an organizing tool and to a certain extent as a prioritizing tool. Typically, any list of personal tasks tends to lend itself to A-B-C prioritization (5-10% of the tasks take 70% of the time, so get the other tasks done first so you can focus).
It is a grouping tool, not some sort of mystic panacea or karmic truth that will bring you inner peace. If the tool works for you, great — if not, find one that does.
Aaron says on November 6th, 2005 at 1:03 pm
One must also wonder that if this principle is truly valid, will it apply to every situation? For example, say that you maximize your return in sales by focusing solely on the 20% customers that yield 80% of the revenue. Becuase you ignored the other 80% of the customers, in one respect, the original “20%” would become the new “100%” of the focus. Would the Pareto Principle still apply, in that one-fifth of the new actions would yeild 80% of the results? Therefore, going back to the total number of acions, approximately 4% would yield 64% of the total results. Carrying this principle ever further would mean that less than one percent of one’s actions would yield approximately 50% of the total results.
Therefore, to what group of actions and results does this principle apply? At what point does it become meaningless? Can actions be grouped on such a definite scale? Furthermore, knowing this, can one really take advantage of the principle as the above article proposes?
Brian Small says on January 24th, 2007 at 2:21 pm
I think this Adrian fellow to be wrong. It would seem to me that his statements are all hypothetical, he does not speak from experience. In my business, conducted over a 15 year period it was extremely clear that approximately 80% of my income came from the SAME 20% of my (400 or so) clients, year after year. The other clients were important to me, after all, few of us want to give up 20% of our income, given that we are committed to a full work week, a reasonable position to take in most businesses anyway. Adrian has spent too much time thinking instead of doing. He admits he does not know, and askes “can you find out?” YES, of course, look at your records. Duh.
Adrian says on January 24th, 2007 at 4:25 pm
Well, Brian, I’m saddened that you resort to a personal attack on me, rather than a reasoned argument. Especially since you know nothing of who I am or what my experience has been.
Far from being a theorist, I have been a senior executive in several large, multinatinal businesses. The question that I asked bothers many people — and it can’t be dealt with by a superficial response like yours.
Your experience is valid, but may not be typical. A little more humility might serve you well.