Vilfredo Pareto was an Italian economist who developed a very exciting and important theory
First the history: Whilst working in the UK in 1897 Pareto identified that 80% of the wealth in England was in the hands of 20% of the people.
In the fifties, Quality gurus like Juran and Deeming referred to the “Pareto Principle” as part of their work with American and Japanese companies.
Although Pareto himself never referred to his “principle” the post-war economic miracle in both of these countries helped secure Pareto’s place in history.
The Pareto Principle has since become one of our “laws of life” and there are many places where we can see evidence of it in our lives today:
- 80% of absenteeism comes from 20% of the people
- 80% of perceived customer value comes from 20% of what you offer them
- 80% of what you achieve at work comes from 20% of the time spent at work
- 80% of famine, disease and poverty can be found in 20% of countries
- 80% of accidents are caused by 20% of drivers
- 80% of traffic jams occur on 20% of our roads
- 80% of your time is spent walking on 20% of your carpets
- 80% of surplus weight is caused by 20% of the things we eat
- 80% of our time on the phone is spent talking to 20% of the people in our address books (although you should abandon any theories on telephone behaviour if you have a teenage daughter!)
In business, the Pareto Principle can often feel counter-intuitive as we like to think that “all customers are important” or “all employees have the same value” or “all new enquires should be treated in the same way.” This is not necessarily the case.
“There is nothing so unequal as the equal treatment of unequal issues!”
We are living in challenging times and many of us are going to need help to survive and thrive. So what advice would Mr. Pareto give you if he was your business coach today? With his 80-20 thinking hat on, he would probably tell you to:
20% of items on your things-to-list will make 80% of the difference in 2010. Identifying and staying focused on this low number of high-impact items is clearly going to have more value to your business than focusing on a high number of low-impact items. Strive for excellence in a few things rather than getting lost amongst the many things.
Track customer profitability
If 20% of your customers (group A) produce 80% of the profits and 80% of your customers (group B) produce 20% of your profits then group A are going to be 15-16 times more profitable than group B. Do you have processes in place to track and measure customer profitability? Don’t mark-time with customers. Either manage them “up” or manage them “out.”
Water the seeds, not the weeds!
It is very easy in business to spend too much time, effort and money on poor performers. Although we sometimes feel we have a “duty” to these people remember that we also have a duty to our good performers who could become even better. So, in the words of an ex-boss of mine “Phil – you should be spending more time watering your seeds, not your weeds!”
Don’t be a perfectionist.
80% of your work will neither be appreciated nor valued. When you have met and exceed the needs of your customer or your colleague, start doing something else. As General Patton once said “A good plan actioned today is better than a perfect plan actioned next week!”
Find out what customers really value.
20% of your customer offering will account for 80% of the value they receive. Do you have a process in place to proactively audit customer feedback to ensure that you, and your customer, are both on the same page of the “hymn sheet?” Do you carry out face to face audits with your top ten customers? Do you have the “intelligence” you need – it is impossible to make improvements within our businesses unless we know where we are starting from.
Win over the key 20% of people.
If you are embarking on a culture-change programme in 2010, try and win over the 20% of people who have a dramatic influence on the remaining 80% of their peers. Some of the 20% may be militant or difficult “wild ducks who refuse to fly in formation” but if you can win them over you will achieve your cultural goals in lightning time. Sven Goran Erikson used this strategy during his time as England manager and often referred to his two key players (Michael Owen and David Beckham) as his “cultural architects.”
Win the winnable.
What is the value of the proposals, quotations and presentations building up in your business pipeline? Mr. Pareto would tell you that 20% of these proposals are going to be 80% winnable. So don’t spread your resources across all prospects – identify the ones that are winnable and pile in your resources to bring them on board. To quote Napoleon “March dispersed but fight concentrated!”