Pareto Principle: Does Your Organization Have An 80/20 Situation?
June 9, 2021
The namesake founder of the 80/20 analysis, Italian economist Vilfredo Pareto, was enlightened one day, when he was carrying out a study at the end of the 18th century in which he ascertained that 20% of the Italian population owned 80% of the property.
However, this 80/20 rule, or Pareto Analysis, in fact, wasn’t refined by Pareto himself, but rather by Romanian-born management expert Joseph M. Juran in the 20th century. Juran would go on to hold several senior level private and public sector roles and in the 1950’s would be deeply involved in the revolution of quality and process control in Japan.
In addition to relationships among inputs and resources and outcomes, there can be causal relationships that are surprising, as the “iceberg” diagram below illustrates:
This often cited “80/20” rule is sometimes misconstrued, such as managers think that the 80 and 20 are portions of the same 100, when they are not.
Juran determined that resistance to change is the single most impactful root cause of quality issues, poor sales, and other organizational failures.
The 80/20 rule is often applied to applied as a simple offhand metric to quickly test assumptions. Oddly, the numbers done in analysis often support the notion that twenty percent of your products will generate eighty percent of your income or, twenty percent of your income will require eighty percent of your resources.
Examples include:
- 80% of a firm’s customer complaints originate from 20% of the products or services delivered.
- 20% of the products or services produce 80% of the profits.
- 20% of the influencers involved in sales and business development generate 80% of the sales and/or gross margin and/or net income.
- 20% of the system failures are caused by 80% of the system problems, incorrect, absent, or overzealous or complicated processes.
- 20% of your customers could consume 80% of your time.
Do some objective analysis in your organization and see if the 80/20 rule pencils out the way Pareto and Juran had envisioned. It’s a fun exercise, and it’s fascinating to unveil how often metrics seem to adhere to this basic math.
It’s also a great way to isolate the “resistance to change” factor in your organization and move past it, as often the company-, business unit-, even departmental- culture can be barriers to moving the organization forward.
