The Pareto principle, also known as the 80 and 20 rule, states that 80% of the effects come from 20% of the causes, which means that there is an unequal relationship between inputs and outputs. The idea, named after economist Wilfredo Pareto, stems from the imbalance in land ownership in Italy. Today, it uses in businesses in various industries. For example, 20% of a company’s employees may generate 80% of its profits.
Here are the articles to explain, What is the Pareto Principle 80 and 20 rule? Basic Applications and Best Practices
The idea works best in customer service-based businesses and has stood adopted by project management software. This principle also applies to personal development settings. For example, 80% of work-related output may come from only 20% of a person’s working time.
Benefits of the Pareto Principle
The Pareto principle helps individuals and organizations determine which actions have the greatest impact on outcomes. This principle is beneficial because it:
- Display the object to reward. If 20 percent of employees drive 80 percent of an organization’s profits, then those 20 percent should reward and compensate accordingly.
- Reveal areas for improvement. Identifying the 80 percent of business operations that drive only 20 percent of outcomes can help organizations determine which operations or departments need an overhaul.
- Optimize resource allocation. Finding that 20% of executive operations shows that organizations can increase their budgets to be more profitable.
- Create maximum value. Organizations and individuals use the 80/20 rule to prioritize their actions for full benefit no matter what they are doing.
Basic applications of the Pareto principle
The Pareto principle can use in almost any situation. The most common business examples fall into the following categories:
- Productivity: This rule can use to prioritize which tasks need to stand done first. Individuals should tackle the highest-impact 20% of tasks first, before tackling the other 80% of important but lower-impact items on their to-do list.
- Decision-making: When solving problems, teams can first identify the causes of challenges, divide them into groups, label the impact of each group on the business, and then focus on the set of issues that have the greatest impact on the company.
- Quality Control: The Pareto principle is often used in the Six Sigma quality control methodology to help one visualize data and prioritize actions. The method is a general operations management system that reduces the amount of variation in the process to increase yield. The 80/20 rule determines which changes have the greatest impact on the process.
Pareto Principle Best Practices
While the Pareto principle is a common observation, it is not a proven mathematical rule. The best practice for this rule is to keep the following considerations in mind:
- Observation, not law. While the Pareto Principle is true in many situations, it is not always accurate. Knowing it’s not the law, organizations can simply use it as a guide to identifying the actions and people that drive the most profit. Depending on the circumstances, this percentage may be higher than 20%.
- Remember the other 80%. Even if 80% of profits come from 20% of actions, the remaining 80% of actions still matter. Resources can reallocate based on ROI, but that doesn’t mean the other 80% of actions should eliminate from the organization. After all, the most effective 20% are often supported by the other 80%.