The Pareto Principle in management or how to work smart on the right things

In the early 1900’s, an Italian economist, Vilfredo Pareto created a mathematical formula describing the unequal distribution of wealth he observed and measured in his country: Pareto observed that roughly 20 percent of the people controlled or owned 80 percent of the wealth.  After Pareto made his observation and published his findings and formula, many others (in both science and business) observed similar phenomena in their own areas of expertise. This observation (the principle that 20 percent of a set is generally responsible for 80 percent of a related result), became known as Pareto's Principle or the 80/20 Rule, and can be a very useful and effective tool of modern-day business management. 

What It Means To Business People?

The 80/20 Rule means that in any set of things (workers, customers, etc.) a few (20 percent) are vital and many (80 percent) are considered trivial. In Pareto's case, he found that roughly 20 percent of the people in his country dominated with 80 percent of the wealth. Project Managers know that 20 percent of work (usually the first 10 percent and the last 10 percent) consume 80 percent of the time and resources. The 80/20 Rule can be applied to almost anything! You know 20 percent of your inventory occupies 80 percent of your warehouse space. Similarly, 80 percent of your inventory items come from 20 percent of your suppliers. At the same time, it’s likely that 80 percent of your revenues will be the result of sales made by 20 percent of your sales staff.  And 20 percent of your workers will cause 80 percent of your problems, while another 20 percent of your staff will deliver 80 percent of your entire production. 

How Pareto’s Principle Can Help Us?

The Pareto Principle in management reminds us to stay focused on the “20 percent that matters”. Of all the tasks performed throughout the day, one could say that only 20 percent really matter.  Those tasks in the 20 percent very likely will produce 80 percent of our results.  Thus, it’s critical that we identify and focus on those things.  

Since 20 percent of your employees likely produce 80 percent of your results you should focus your limited time in management of only that 20 percent. However, this proposed implementation of Pareto’s Principle to management is flawed, because it overlooks the fact that 80 percent of your time should be spent doing what is really important, or most likely to deliver the greatest return.  By helping your “good” salespeople become better, you are more likely to reap greater results than by dedicating the same management effort to helping the fewer “great” salespeople become terrific. Thus, it’s wise to evaluate various management situations and apply the Pareto Principle appropriately – and wisely. 

Pareto's Principle should serve as a reminder to us to stay focused on investing 80 percent of our time and energy on the 20 percent of work that’s really important.  It’s not just important to “work hard” and “work smart”, but also to work smart on the right things.

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