Understanding the Pareto Principle (The 80/20 Rule)

Understanding the Pareto Principle (The 80/20 Rule)

Delphinium Business Coaching - Understanding the Pareto Principle (The 80/20 Rule)

The Pareto Principle or ‘The 80/20 Rule’ was developed by Vilfredo Pareto, the Italian economist, as he realised that 80% of Italian land was owned by 20% of the population.  His theory was developed by Dr Joseph Jurans in the 1940s, who labelled it the ‘Pareto Principle’.  This theory has become popular in business and is based on the theory that 80% of your business comes from 20% of your client base and 20% of your employees produce 80% of the output.

How does the Pareto Principle work?

The Pareto Principle is a rough guide about typical distribution.  The key point is that the numbers don’t have to be 80/20 and they do not need to add up to 100.  For example, you may find that 30% of your employees produce 85% of the output.  The key point is that most things are not evenly distributed and to maximise results, it is key that you identify those that are contributing more than others.

Customers

Applying the Pareto Principle can help you identify which customers are providing you with the most valuable relationships.  By looking at those customers with whom you have the most profitable relationships, you can start to determine where you should be investing most of your time and energy.  That’s not to say you should disregard your other customers, but it can help you to focus your time and effort on the customers providing you with the best commercial return.

This exercise will enable you to profile your ‘ideal’ customer by identifying the characteristics of your most profitable customers.  You can then make any necessary adjustments to your marketing strategy to target your ‘ideal’ customers, who are likely to generate greater profit for your business.

Employee Performance

The Pareto Principle can also help you to identify those employees who are responsible for the greatest output.  This will enable you to focus on rewarding these employees, setting an example for other members of the team.

In appraisals and review meetings, start to compile a list of characteristics your most productive employees demonstrate.  You are likely to realise that 20% of your employees account for 80% of your growth.  By defining the characteristics and tactics your most productive employees use, you can coach and encourage the rest of your team to develop similar activities to boost your overall outputs.

Employee Engagement

Where there are issues with employee engagement, investigating and either improving or resolving the top 20% of issues causing employees to become disengaged, you will see an 80% improvement in engagement.  This will also result in an 80% improvement of areas that poor engagement affects such as poor performance, high absence and high sickness rates.

Turning the Pareto Principle on its head

The Principle can also be turned on its head by looking at 20% of key issues to create an 80% improvement.  Here are some examples:

Employee Engagement – Where there are issues with employee engagement, investigating and either improving or resolving the top 20% of issues causing employees to become disengaged 80% of the related areas such as poor performance, high absence and high sickness rates with dramatically improve.

IT Systems – To make dramatic improvements with your IT systems concentrate on fixing the top 20% of reported bugs and replacing 20% of your oldest/slowest hardware.  The result of this is that you should see an 80% improvement in your overall outputs

Ultimately, applying the Pareto Principle will lead to increased revenue generation.

At Delphinium Business Coaching, we can help you to review your current business practices and activities to help you define the 20% of your workforce and customer base currently generating 80% of your productivity and profit.  We can also help you identify issues affecting your business and put plans in place to address them.  For more information about how you can apply the Pareto principle contact us today.