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The #NowIUnderstand glossary: the Pareto Principle also known as Pareto’s Law and the 80/20 rule

Everyone has heard of the famous Pareto’s Law, the principle describing the recurring observation that 80% of output is achieved by 20% of the work, or, looked at another way, 80% of effects come from 20% of causes.

Pareto’s Law prompts us to identify those actions with the most significant impact, and it applies to all areas: quality, continuous improvement, project management, innovation, and so on. However, judging from the proliferation of transformation projects in organisations, it does not yet wield much influence over priority management. This article will show you how you can easily improve your time management and ensure your efforts deliver useful impacts.

Pareto’s Law: definition

Pareto’s Law bears the name of its inventor, the Italian economist and sociologist Vilfredo Pareto, who produced research at the start of the 20th century showing that 20% of taxpayers contributed 80% of tax revenue. He then extended it to a more general observation that 20% of the population held 80% of the wealth. The 80/20 rule known as the Pareto Principle was born.

Since then, the principle has been tested and worked into mathematical formulae useful in many other areas as it applies so very often: economics, sales strategy, human resource management, production, even daily life in general. Joseph Juran takes the credit for its application to quality, following his estimate that 20% of the work produces 80% of the results.

Over the years, the Pareto Principle has gradually become part of the landscape, a universal analysis technique now found in every manager’s toolkit. In fact, its simplicity encourages decision-making based on common sense and a pragmatic point of view, thereby leading to prioritisation by separating the important from the secondary, for example:

  • 20% of customers generate 80% of revenue;
  • 80% of complaints come from just 20% of customers;
  • 20% of effort produces 80% of the added value;
  • 80% of the time is spent on just 20% of the tasks in a project;
  • And so on and so forth...

Pareto’s Law is not, of course, an exact science. The proportions are sometimes adjusted (75/25 or 60/40) and importantly, it does not necessarily result in the elimination of that 80% of the work that produces just 20% of the output.

Pareto’s Law diagram

The Pareto diagram, invented by Joseph Juran, is used to apply the law efficiently. The diagram provides a visual representation of the various causes and effects to highlight the decisive aspects on which action can be taken.

A Pareto chart can consequently help decision-makers to clearly and visually represent key problems and identify the priority measures to resolve them. Instead of concentrating on detailed points, that could potentially cost a great deal of both time and money while delivering barely visible results, Pareto’s Law enables the key factors to be identified very quickly and thus provides the right focus for action.

The Pareto Principle as applied to project management

Cutting to the chase and avoiding wasted time and effort is every project manager’s true vocation. Pareto’s Law and the 80/20 rule are, to this end, a way of deciding between different and competing tasks within a project or project portfolio, enabling pitfalls to be avoided and benefits to be generated quickly:

  • Prioritising the right projects and the right tasks that will best serve the business’ strategy, i.e. “doing the right thing AND doing things right”;
  • Communicating more quickly about the results obtained to improve staff motivation;
  • Completing projects on time and on budget.

In times of economic stress, businesses tend to launch a plethora of projects simultaneously, intended to improve competitiveness but unfortunately resulting in repeated wasted time, or even disengagement from employees who are constantly pulled in different directions. They would do better to follow the Pareto Principle to identify and prioritise those tasks and projects that deliver 80% of the organisation’s performance.

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