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How Useful Is the Pareto Principle?

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.

  1. Can you identify which actions make up the useful 20%? And can you do so in advance?
  2. 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.

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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%?

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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.

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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:

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  1. 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.
  2. 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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Last Updated on September 22, 2019

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