Monday, January 30, 2006

Pareto's Principle (80/20 Rule)

The Pareto principle, also known as the 80/20 rule, the law of the vital few and the principle of factor sparsity, states that for many phenomena, 80% of the consequences stem from only 20% of the causes.

The principle was suggested by the Quality Management pioneer and thinker, Dr. Joseph M. Juran, in the late 1940s. Juran inaccurately attributed the 80/20 Rule to a phenomenon who was first proposed by the Italian economist Vilfredo Pareto, who in 1906, created a mathematical formula to describe the unequal distribution of wealth in his country. He observed that 80% of all properties in Italy were owned by only 20% of the Italian population. In other words, 20% of the Italians owned 80% of the country’s wealth.

After Pareto made his observation and created his formula, many others, like Juran, observed similar phenomena in their own areas of expertise. Juran, recognized a universal principle which he called the "vital few and trivial many" and reduced it to writing. In an early work, a lack of precision on Juran's part made it appear that he was applying Pareto's observations about economics to a broader body of work. As such, the name Pareto's Principle stuck on.

As a result, Dr. Juran's observation of the "vital few and trivial many", the principle that 20% of something always are responsible for 80% of the results, became known as Pareto's Principle or the 80/20 Rule.

The 80/20 Rule means that in anything a few (20%) are vital and many (80%) are trivial. In Pareto's case it meant 20% of the people owned 80% of the wealth. In Juran's initial work, he identified 20% of the defects causing 80% of the problems. Experienced project managers will know that 20% of the work (the first 10% and the last 10%) consume 80% of the time and resources available. One can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

The value of the Pareto Principle for a manager is that it reminds the manager to focus on the 20% that matters. Of the things the manager do during your day, only 20% really matter. Those 20% produce 80% of the results. It is critical that the manager identifies and focuses on those things. When it comes to the crunch, the manager needs to remind himself of the 20% he needs to focus on. So if something in the schedule has to slip, if something isn't going to get done, the manager must make sure that it's not part of that 20%.

Pareto's Principle, the 80/20 Rule, should serve as a daily reminder to focus 80% of the time and energy on the 20% of the work that is really important. So the wise manager should not just work smart, he should work smart on the right things.

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