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The 80/20 Rule or Pareto's Principle

Updated on July 17, 2011
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Businesses and financiers around the world know about this “secret” to managing – namely the Pareto Principle or as it is sometimes called the 80/20 rule.  An Italian economist (Vilfredo Pareto) in the early 1900’s noticed that it was only 20% of the population that owned 80% of the available land.  After he did some further investigations he found that this “rule” applied in many different areas also and the Pareto Principle was born.

Businesses today utilize this formula to determine where best to concentrate their efforts as strangely enough in any large system of measurement this factor still predominates and in call centres for example when a proper analysis is conducted it is evident that 80% of the incoming calls received are due to 20% of the issues that the business is experiencing.  While the numbers might not always be exactly 80/20 they are generally close enough so that in terms of resolution this value can be used.

How can you calculate your 20?

Obviously to have a positive impact you need to be able to determine what the top 20 issues are that are impacting your business.  From a technical support and customer service perspective, the simplest method is to categorize each of the calls that you receive in your call logging software and then run a simple report at the end of every week or month to determine which of those issues have had the most calls received.  Now simply do some basic math to determine how many of these issues account for the top 20% of your incoming calls and you will know which issues you need to focus on to see a reduction in volume of up to 80%!  As I’m sure you can well imagine this can be a huge cost savings for businesses and an exercise well worth pursuing.

Now for those of you that are worried about solving all the problems of the world – rest assured, as great as the Pareto Principle is, it’s not a universal solution and unfortunately businesses will still continue to have problems regardless of how well the adopt the 80/20 rule.  The hope though is that they will be able to resolve the ones that are impacting the majority of their customers faster and as while you can gradually work down the list of outstanding issues, newer pressing issues will rear their ugly heads.

Flipping it on itself

Now while the 80/20 rule is great for bringing down the volume of incidents and issues that businesses have, it can be flipped upon itself to try to drive new business into a company also.  Again if you do a simple analysis, chances are good that you will find that only 20% of your customers are actually generating 80% of your revenue.  By focusing on that business and “tiering” your customers you will ensure that you are able to provide a higher level of service to the customers that matter more to your business.

From a management perspective you will probably find something similar in the teams that you are responsible for also.  The 20% of your team that are producing 80% of the work should be well recognized and rewarded to ensure their loyalty and effectiveness to you and your business in the long term.

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    • My SciFi Life profile imageAUTHOR

      My SciFi Life 

      7 years ago from London, UK

      LOL - hi Winsome - thanks for the post and comments. Really enjoyed your math and unfortunately I do agree with you! :) Moving to Italy sounds like a really good idea - I could do with some sun myself. Thanks for the follow too!

    • Winsome profile image

      Winsome 

      7 years ago from Southern California by way of Texas

      Hi MSL, I think 20% of us do 80% of the work and out of that 20%, half are answering questions fielded by 20% of those not working. That leaves 10% and half of those are re-doing the work that 20% of the 80% tried to do. Out of the remaining 5%, 90% are overworked and are on disability leaving only 1%. All but 2 of the 1% are busy with current work and that leaves all new work for you and me. I don't know about you, but I'm planning to move to Italy to check out Pareto's figures. I hope you stay healthy because there is a heck of a lot of phone messages waiting for you. Good luck. =:)

      Oh and congratulations on 100 hubs!

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