A problem many of us have is too many measures and, consequently, too much to improve. We need to prioritise, but we somehow don’t do it well enough. Here’s a method to focus on what really matters most, that has over 116 years of proof that it works…
In 1897, over a century ago, an Italian economist called Vilfredo Pareto made the discovery that 80% of the wealth of a population was owned by 20% of that population. The Pareto Principle, or 80/20 rule, is a pattern of predictable imbalance that keeps popping up in all kinds of contexts ever since. For example, the Quality Movement certainly grabbed onto it, coining phrases like “80% of the problem is caused by 20% of the causes.”
The 80/20 rule is a guide for how to think about improving things. If you want a measure or result to improve, you have to change something. And with even a basic 80/20 analysis, you can find out what those “somethings” are which will have the greatest impact.
And in an age where time is scarce, and to-do lists are long, the sharper our focus can be on what matters most, the better our results will be.
If you’re not completely happy with how your work or life is going right now, or you know that there is scope to improve it, then practice asking questions like these:
Asking questions like these shows you how much more influence you can have in changing things in your life and work. You don’t have to fight the current, nor do you have to just lay back and let it carry you. You can find a diagonal escape out of it with a focus on causes you can influence.
The 80/20 rule helps focus your attention on the things that have the BIGGEST likely impact on the results you want in your life. And by focusing on those things, you can more easily examine how you can influence them.
When you have framed your result and its potential causes in 80/20 questions like those above, you’ve set the scope for what kind of data to collect. If you’re going to know which are the 20% of causes that produce 80% of your result, you’ll need to measure both your result, and the degree of impact of each cause.
If you’re uncertain exactly what to collect data on, try using a cause-effect diagram to map out the possibilities (also known as a fishbone diagram – click here for examples). Then you can measure or estimate the relative impact of each cause on your end result.
A simple bar chart or Pareto chart is a great way to display the 80/20 analysis, once you have the data. For each cause you list, against it you will have a number that represents the size of its impact on your result. It might be dollars or hours or incidents, depending on your result. Chart the data and look for the tallest 20% of bars in the chart that visually account for about 80% of your measure (click here for examples).
Sometimes you’ll find patterns that are 99/1, or 80/10 or 70/30. That’s fine. The point is that cause-effect relationships are very imbalanced; you’ll rarely find 50% of the causes producing 50% of the effect. So prioritise, and give your attention to the 20% that matters most right now.
What experiences have YOU had with cause analysis and Pareto charts? We’d all love to hear your story so please share it at the Measure Up blog…
We all know that Pareto Analysis is a good tool for prioritization and improving the focus on working on fewer things to focus on in order to achieve the most of the set objective. The deviation to this rule comes in the cases of life-and-death or in the matters of show-stoppers of business. But then again, when it comes to a large volume of matters of life-and-death, or of show-stoppers of business, one would still apply 80-20 rule, to determine which specific ones to focus on, in order to minimize the losses and/ or maximize the gain. For example, in a case of 1000s of victims of a natural disaster, the relief worker is likely to save all the children first, who have a full life ahead, rather than all the older people.
Pareto Analysis, therefore, is effective when one has a large volume of subject matters to address to, and one is not able to decide which ones to prioritize. Pareto Analysis is not relevant in individual cases.. In the same example above, if an individual is likely to attempt to save his/ her old parents, than an unknown child who also is a victim of the disaster. This happens to be an individual case, and hence does not come under the purview of Pareto analysis.
While the 80/20 rule is widely known among business analysts and managers many companies do not even try exploit its power to increase profitability.
A valuable application of the Pareto rule in business refers to a distribution ratio between profits (reward) on the one hand and products, markets, sales territories or customers (effort) on the other.
Drilling below the surface of the 80/20 distribution one often finds that the top 20% of the products contributes 80% of the profit, the next 40% generates 20% and the bottom 40% usually has no contribution to profitability.
Also, typically only 5% of the customers generates close to 50% of the company’s profits while the bottom 50% customer group contributes about 5% to the profit pool. As a result the top 5% group is 100 times more profitable than the customers in the bottom 50%.
The application of Pareto Strategy to streamline business profitability has three main goals:
a) Reduce the cost and expense that supports the bottom 50% in order to reduce the number of unprofitable customers and products or move them into profitability.
b) Use business analytics to uncover what makes the top 20% of products or customers 16 times more profitable than the rest by understanding what is that they have in common. The objective here is to replicate their successes by creating more products, or acquiring more customers that share their characteristics.
c) Repeat this process to optimize the business profitability across different dimensions like brands, products, SKUs, technologies; customer parents and their branches; sales territories, distributors, dealers, agents; market segments and business units.
80/20 Rule is mainly for evaluating overall what matter for the business. It helps targeting at most 2 objectives for rapid and quick improvement or reducing risks.
The fish-bone method should be followed after Pareto Principle analysis in order to get in details steps for such improvement or reduction.
Consider a reference closer to home from Edwards Deming, the Plan-Do-Check-Act (PDCA)guy. Ed concluded the primary source of process variation to be the “system”, management owns the “system”, therefore management is the primary source of process variation. Deming addressed this in his 85/15 rule in the 1950s. Before passing away in the 1993, he changed the estimate to 90/10 saying the state of business quality today is terrible.
Ed was big on process standardization and if were still with us, he’d advocate the automation of good practices, such as ServiceNow with COBIT. Process first then tool. COBIT 5 has all the basic metrics in the COBIT 5 Enabling Processes book. No need to reinvent the wheel.
379 Metrics at three levels across 5 domains and 37 processes -
54 Enterprise metrics
59 IT-related metrics
266 Enabling metrics
What do you have?