New Year brings with it splendid new opportunitiesJanuary 4, 2016 10:46
What is the art of focus? Why does the 80-20 rule matter?
I have often been to restaurants that have excellent food but very poor service during peak hours. I am pretty sure that the owners of the business were misdirected to resource, based on averages
August 6, 2012 9:00 by kippreport
Most of us have heard about or know the Pareto principle, sometimes referred to as the Pareto efficiency or the 80-20 rule. However, I have observed that not many people actually give it thought, much less actually apply this ‘universal’ cardinal principle in everyday life and business.
What is the Pareto principle, and why is it so important?
The Pareto principle was suggested by business management thinker, Joseph M Juran, and states that for many events roughly 80% of the effects come from 20% of the causes. It was named after Vilfredo Pareto, an Italian economist who observed that in 1906, 80% of the land in Italy was owned by 20% of the population.
The fallacy of averages
If you are like me, most of you will have heard phrases like these used in everyday business: ‘the average revenue per customer is…’, ‘the average score is this…’ or ‘the average returns of the stock market are…’ and so on.
Pause for a moment and reflect on these situations…
Imagine a pilot deciding to plot his flight path based on an average, terrain height of 3000ft – calculated from a low of zero feet above sea level, and a mountain peak of 6000 feet? Or a person with no swimming skills tried to cross a lake, because someone said the average depth is three feet?
Averages in these contexts mean nothing. They are fallacies in real life. So, discussing averages has no meaning in business terms, especially if the average revenue derived from a few customers is exponentially bigger than the rest.
In my industry (telecommunications), I often hear people speaking about the average revenue per customer, the average minutes of use, the average orders per channel or the average customer care service levels.
These averages are useless and baseless. The average revenue might be a result of having a few large customers versus the rest of the base. Not focusing your attention on these few large customers could sometimes mean the end for some businesses.
In most companies that I have worked for, 80% of incremental sales are generated through about 20% of the salespeople. Still, most training investments are spread across the entire sales force. What would the returns be if companies honed the next fifth or tenth percentile? Imagine the savings, the focus and the tremendous results that can be achieved.
Visualize building capacity for a network, factory, hotel, restaurant and more, based on averages. I have often been to restaurants that have excellent food but very poor service during peak hours. I am pretty sure that the owners of the business were misdirected to resource, based on averages.
Try telling an employee that the average bonus payout is $X, when he or she probably receives one fifth of that $X.
The average is as close to the bottom as it is to the top
As the famous George Carlin said, “Just think of how stupid the average person is, and then realize half of them are even stupider!”
Alfred Sloan also once famously said that, “If you do it right 51% of the time you will end up a hero.”
As you would have noted by now, focusing on the averages really means nothing.
Be laser-focused using the 64-4 law
The 64-4 law is born from the fact that you will not only have 80% of effects coming from 20% of causes, but 80% of the initial 80% will come from 20% of the initial 20% of causes, and so on; 80% of 80% is 64%, 20% of 20% is 4%, hence the 64/4 law.
You do not necessarily have to have figures that add up to 100, such as 80/20. It can be 64/4 or 70/40 – such as 70% of a company’s revenue comes from 40% of its customers. The key is to focus on what matters. Trying to solve all major issues at one time without focusing on a few critical ones is often costly, unattainable and almost always futile.
Pareto as a way of life
The application of the Pareto principle doesn’t just have to be restricted to business; it can be applied to everyday living as well. Just focusing on a few issues, attributes or behaviors can help you address, alleviate or enhance an experience, relationship or whatever it is that you are trying to do.
Life is too short!
In conclusion, I salute and thank Mr. Pareto for this universal principle that can be applied in our everyday life. It might seem too obvious or easy, but remember that most people usually ignore this principle.
If you do not believe me, just observe this at your work place tomorrow. The people from Finance, Sales, HR, Technology, Operations and Marketing will all be throwing ‘averages’ at you. Take note and decide if it makes sense. Force the discussions around stuff that matters. Stay focused, life is too short.