The 80/20 Principle

Pareto’s discovery: systematic and predictable lack of balance The pattern underlying the 80/20 Principle was discovered in 1897, exactly 100 years ago, by Italian economist Vilfredo Pareto (1848–1923). His discovery has since been called many names, including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort and the Principle of Imbalance; throughout this book we will call it the 80/20 Principle. By a subterranean process of influence on many important achievers, especially business people, computer enthusiasts and quality engineers, the 80/20 Principle has helped to shape the modern world. Yet it has remained one of the great secrets of our time—and even the select band of cognoscenti who know and use the 80/20 Principle only exploit a tiny proportion of its power. So what did Vilfredo Pareto discover? He happened to be looking at patterns of wealth and income in nineteenth-century England. He found that most income and wealth went to a minority of the people in his samples. Perhaps there was nothing very surprising in this. But he also discovered two other facts that he thought highly significant. One was that there was a consistent mathematical relationship between the proportion of people (as a percentage of the total relevant population) and the amount of income or wealth that this group enjoyed. To simplify, if 20 per cent of the population enjoyed 80 per cent of the wealth, then you could reliably predict that 10 per cent would have, say, 65 per cent of the wealth, and 5 per cent would have 50 per cent. The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced. Pareto’s other finding, one that really excited him, was that this pattern of imbalance was repeated consistently whenever he looked at data referring to different time periods or different countries. Whether he looked at England in earlier times, or whatever data were available from other countries in his own time or earlier, he found the same pattern repeating itself, over and over again, with mathematical precision. Was this a freak coincidence, or something that had great importance for economics and society? Would it work if applied to sets of data relating to things other than wealth or income? Pareto was a terrific innovator, because before him no one had looked at two related sets of data—in this case, the distribution of incomes or wealth, compared to the number of income earners or property owners—and compared percentages between the two sets of data. (Nowadays this method is commonplace, and has led to major breakthroughs in business and economics.) Sadly, although Pareto realized the importance and wide range of his discovery, he was very bad at explaining it. He moved on to a series of fascinating but rambling sociological theories, centering on the role of élites, which were hijacked at the end of his life by Mussolini’s fascists. The significance of the 80/20 Principle lay dormant for a generation. While a few economists, especially in the US, realized its importance, it was not until after the Second World War that two parallel yet completely different pioneers began to make waves with the 80/20 Principle. Page 7 of the Electronic Book.

What is the 80/20 Principle? The 80/20 Principle asserts that a minority of causes, inputs or effort usually lead to a majority of the results, outputs or rewards. Taken literally, this means that, for example, 80 per cent of what you achieve in your job comes from 20 per cent of the time spent. Thus for all practical purposes, four-fifths of the effort—a dominant part of it—is largely irrelevant. This is contrary to what people normally expect. So the 80/20 Principle states that there is an inbuilt imbalance between causes and results, inputs and outputs, and effort and reward. A good benchmark for this imbalance is provided by the 80/20 relationship: a typical pattern will show that 80 per cent of outputs result from 20 per cent of inputs; that 80 per cent of consequences flow from 20 per cent of causes; or that 80 per cent of results come from 20 percent of effort. Figure 1 shows these typical patterns. In business, many examples of the 80/20 Principle have been validated. 20 per cent of products usually account for about 80 per cent of dollar sales value; so do 20 per cent of customers. 20 per cent of products or customers usually also account for about 80 per cent of an organization’s profits. In society, 20 per cent of criminals account for 80 per cent of the value of all crime. 20 per cent of motorists cause 80 per cent of accidents. 20 per cent of those who marry comprise 80 per cent of the divorce statistics (those who consistently remarry and redivorce distort the statistics and give a lopsidedly pessimistic impression of the extent of marital fidelity). 20 percent of children attain 80 per cent of educational qualifications available. In the home, 20 per cent of your carpets are likely to get 80 per cent of the wear. 20 per cent of your clothes will be worn 80 per cent of the time. And if you have an intruder alarm, 80 per cent of the false alarms will be set off by 20 per cent of the possible causes. The internal combustion engine is a great tribute to the 80/20 Principle. 80 per cent of the energy is wasted in combustion and only 20 per cent gets to the wheels; this 20 per cent of the input generates 100 per cent of the output!

MP3 0 0 0 2 The 80 20 Principle. The Secret of Achieving More With Less. By Richard Koch Chapter 1 Welcome to the 80/20 Principle Quote: For a very long time, the Pareto law [the 80/20 Principle] has lumbered the economic scene like an erratic block on the landscape; an empirical law which nobody can explain. -Josef Steindl The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organization, and by every social grouping and form of society. It can help individuals and groups achieve much more, with much less effort. The 80/20 Principle can raise personal effectiveness and happiness. It can multiply the profitability of corporations and the effectiveness of any organization. It even holds the key to raising the quality and quantity of public services while cutting their cost. This book, the first ever on the 80/20 Principle, 2 is written from a burning conviction, validated in personal and business experience, that this principle is one of the best ways of dealing with and transcending the pressures of modern life.

The 80 20 Principle. The Secret of Achieving More With Less, By Rihard Koch. MP3 0 0 1 The universe is wonky! What is the 80/20 Principle? The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80 per cent of results or outputs flow from 20 per cent of causes, and sometimes from a much smaller proportion of powerful forces. Everyday language is a good illustration. Sir Isaac Pitman, who invented shorthand, discovered that just 700 common words make up two-thirds of our conversation. Including the derivatives of these words, Pitman found that these words account for 80 per cent of common speech. In this case, fewer than I per cent of words (the New Oxford Shorter Oxford English Dictionary lists over half a million words) are used 80 per cent of the time. We could call this an 80/1 principle. Similarly, over 99 per cent of talk uses fewer than 20 percent of words: we could call this a 99/20 relationship. The movies illustrate the 80/20 Principle. A recent study shows that 1.3 per cent of movies earn 80 per cent of box office revenues, producing virtually an 80/1 rule (see pages 17–18). The 80/20 Principle is not a magic formula. Sometimes the relationship between results and causes is closer to 70/30 than to 80/20 or 80/1. But it is very rarely true that 50 per cent of causes lead to 50 per cent of results. The universe is predictably unbalanced. Few things really matter. Truly effective people and organizations batten on to the few powerful forces at work in their worlds and turn them to their advantage. Read on to find out how you can do the same . . .