Saturday, July 21, 2012

The Pareto Principle


Sometimes one achieves a blinding insight into the hidden workings of the universe by reading a simple principle of explanation.

Some of these have been previously written about in Bytes:

·         The Peter Principle (“In a hierarchy, employees rise to their level of incompetence”).

·         Dr Peter’s Second Principle (“Work on a task expands to fit the time allowed for the task”).

·         Occam’s Razor (“The simplest explanation is usually the best one”).

·         The KISS Principle (“Keep It Simple, Stupid”).

·         The 6 P’s (“Prior planning prevents piss poor performance”).

·         Murphy’s Law (“If anything can go wrong, it will, and at the worst possible time”).

It still fascinates me that such profound truths become self evident when pointed out in a simple, easy to understand format.

Thus when Hofstadter’s Law is explained – “It always takes longer than you expect, even when you take Hofstadter’s Law into account – it all becomes clear as to why deadlines are unable to be met or one feels that one is always behind on the scheduled times and task.

So it is with another Law of the Universe, one known as the Pareto Principle.

What is it?

Also known as the 80-20 Rule, the Law of the Vital Few and The Principle of Factor Sparsity, it holds that in many situations and for many events and circumstances, roughly 80% of the effects come from 20% of the causes. 

Developed by Joseph Juran, he gave it the name Pareto Principle after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population.  Juran identified the principle when he observed that 20% of the pea pods in his garden contained 80% of the peas.

Joseph Juran (1904-2008)

Vilfredo Pareto (1848-1923)

How does it work? 

The principle is based on the fact that most things in life are not distributed evenly.  Each unit of time, or work, does not contribute the same amount.  Most things are not 1/1, where each unit of “input” (effort, time, labour) contributes exactly the same amount of output. 

Pareto’s first observation in 1971, that 80% of Italy’s wealth was held by 20% of the population, caused him to investigate other countries.  His enquiries showed that a similar distribution applied.  A 1992 UN report showed that 20% of the world’s population controlled 82.7% of the world’s income. 

The 80-20 rule also applies to the 80-20 subgroups.  Thus we find that 80% of the world’s wealth is vested in 20% of the population, but that within the top 10 persons, the top 3 have as much wealth as the next 7 persons combined. 

What are some examples? 

·         20% of the input creates 80% of the result

·         20% of the workers produce 80% of the result

·         20% of the customers create 80% of the revenue

·         20% of the bugs cause 80% of the crashes

·         20% of the features cause 80% of the usage

·         80% of sales time is spent on 20% of the customers, not necessarily the profitable 20%

·         80% of the traffic in town travels over 20% of the roads

·         80% of benefit comes from the first 20% of effort

·         80% of our personal telephone calls are to 20% of the people in our address book

·         80% of your profits come from 20% of your customers

What is it good for? 

The value of the Pareto Principle is the recognition that most things are not distributed evenly, so that equal allocation of time, labour and resources may not be appropriate in various situations and circumstances. Identify which aspects or activities generate the most results and focus on them. 

As an example, if 80% of a company’s income is coming from 20% of its products, it makes more sense to focus advertising and marketing on the 20%.  Microsoft found that fixing the top 20% of the most reported bugs eliminated 80% of the errors and crashes. 

That is not to say that the other 80% can necessarily be disregarded.  If 80% of an item is built in the first 20% of the time, that does not mean that the remaining 20% can be dispensed with. 

The Pareto principle is a means of focusing attention on main items and activities.  It is an observation only and can be a handy tool but should not replace commonsense. 

The Pareto Principle has been extended to a variety of fields and situations, and to an ever increasing range of cause and effect phenomena. 

Does it always apply?  Is it always 80-20? 

No.  The fact that it is 80% and 20% is coincidental in adding up to100%. Apples and oranges.  It could be 80/20, 90/10, or 90/20, the numbers don’t have to add to 100.  In one situation 20% of the sales staff may account for 80% of the sales, in another it may be that 40% of the sales staff account for 50% of the sales.

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