The 80/20 Rule-Pareto’s Principle

Many people have heard of the 80/20 rule. It is known by a handful of other names including the law of the vital few and the Pareto Principle. Simply put, the 80/20 principle says that roughly 80% of results come from 20% of causes.

Why Should I Care?

What does this mean to you? If you understand how to apply the 80/20 rule you can do more with less. Who doesn’t want to do more with less? I sure would like to do more with less whenever possible. I’m not lazy (well, not all the time), I just like being efficient. By the way, when you’re efficient you have more time to be more effective too. So, anyone who was about to argue that effectiveness is more important than efficiency, put that in your smoke and pipe it.

Real World Example

Some simple real life examples make it clear how it works.

  • Business – 80% of profits come from 20% of customers.
  • Technology – Microsoft has found that 20% of the bugs in their software cause 80% of errors and crashes.
  • Safety – 20% of safety hazards cause 80% of injuries and accidents.
  • Wealth – 20% of the richest people control 80% of the wealth.
  • Health – 20% of patients in the United States use 80% of healthcare resources.
  • Crime – 80% of crimes are committed by 20% of criminals.

 

Even among the world’s top ten richest people, three (Carlos Slim HelĂș, Warren Buffett, and Bill Gates) are as rich as the other seven combined.

It’s Not Just a Good Idea

There are a few things about the rule that are important to understand. First, the numbers 80 and 20 are not fixed numbers that are always the same. They are a rule of thumb. Sometimes the ratio will be a little different, but the concept is that a minority of causes account for the majority of effects.

The second important thing to grasp about the 80/20 rule is that it is a naturally occurring phenomenon, and scientists consider it a law. Yes, it’s not just a good idea, it’s a law. This is a very important aspect of this rule because what it implies is that, whether we like it or not, it works; just like gravity. You can choose to not believe gravity is a law, but if you step off a cliff you won’t float because you don’t believe in it. You’ll drop like a rock. It’s the law. Scientists have even observed that brush fires seem to occur in a pattern that is consistent with the 80/20 rule, so it has been observed to happen in nature, not just in man-made situations.

You Can Use It to Your Advantage

One of the great things about the 80/20 rule is that if you understand and apply it, you can get more things done, more efficiently than if you don’t use the rule. Tim Ferris wrote a book called The 4-Hour Workweek that talked extensively about using the 80/20 rule to work less and get more done. Ferris famously incorporated the Pareto Principle into his life to help him accomplish some pretty amazing things all before he turned 30, including:

  • First American in history to hold a Guinness World Record in tango
  • Speaks 5 languages
  • National Chinese kickboxing champion

 

In my consulting work, the biggest application of the Pareto Principle I’ve seen has been in the area of working with budgets and financial results for businesses. And yes, the rule applies there just like everywhere else. As it turns out 20% of the items in a business’s budget account for 80% of the sales, profits and/or problems. In short, just like everywhere else, focusing on the 20% will take less time and get more results than just going down a list. The funny thing is, I’ve spoken at national conferences where I was asked to deliver a presentation to an audience of conference attendees comprised of Chief Financial Officers, Controllers, Treasurers and the like. All of these people are very senior finance professionals and many of them routinely express that, although they are familiar with the 80/20 rule, they don’t use it as much as they could or should.

What You Can Do About It

Sometimes the most important step in making change and/or progress is awareness. Most people have heard of the 80/20 rule, but few actually use it effectively. If all this article did is to get you to think about how you can use the rule to improve something, great. If all it did was entertain you, that’s cool too, but hopefully you’ll do what Tom Hopkins refers to as GOYA. Get off your assets. You thought I was going to say something else just then didn’t you. Shame on you. Now GOYA and start using the 80/20 rule to your advantage.

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