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18 Dec
2014

Karen

Senior Associate Consultant
 

My professors at the University of the Philippines (UP) would probably scold me for saying this, but I've honestly forgotten much about what I learned 8 years ago as an Economics major. There is one concept though that stuck in my head and which continues to be helpful in my career and personal life: The Pareto Principle.

The Pareto Principle statesthat, in most instances, 80% of effects come from 20% of its causes. Think about this statement for a few seconds and let it sink into your mind. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of land in Italy was owned by 20% of the population.

Is the 80/20 rule a coincidence? Let me give you some examples* to further attest to this rule:

  • You might have heard your CEO say that 80% of your company's sales come from 20% of your customers, or that 80% of your company’s revenues come from 20% of your product line (i.e. one or two blockbuster brands make up the company’s cash cow). It is amazing to note that these results can be found across different industries and have been proven from time to time.
  • You should also know by now that roughly 80% of the world's income come from 20% of the richest people on earth.
  • It has been noted that about 20% of patients use 80% of resources of a hospital (I suppose those that involve invasive operations).
  • Microsoft once mentioned that fixing 20% of their most commonly reported bugs led to 80% reduction in crashes and errors in any given system.

Magical, isn't it? The list of proven examples just goes on and on.

But why 80-20? Why not 70-30 or 50-50? I honestly don't know. Ask scientists and economists and their answer will be the same “I honestly don’t know” shrug. It seems that this is the equilibrium of our universe. The world balances to this number, the same way that our bodies look proportional at a given height, weight and age.

The magic with the 80-20 rule is that it helps us make a lot of things predictable in this unpredictable world (and as they say, the more control yielded, the more power gained).

The Pareto Principle means that if 80% of your company's sales come from 20% of our customers, then it makes sense to devote your time to the 20% to make more money (Look at telco companies, 80% of their revenues likely come from the 20% highest-paying customers on postpaid accounts).

If you are an entrepreneur managing your own business with a group of sales guys visiting and contacting clients on a daily basis, it makes sense to ask them how much they are spending their time on their clients. Are they spreading their time equally across all clients depending on their importance and contribution to your business?

From a Pareto Principle perspective, your sales guys should be spending more time with the top 20% of your clientele because they will likely yield more than half (that’s 80%) of your sales. They should be talking longer to these clients, probing what will keep them loyal to your products or businesses, and offering them better than ever customer service.

Conversely, you can also say that if 20% of a class falls under the top tier A or B grade, the teacher becomes much more aware (and likely realizes that she has a long way to go) that she needs to spend her time better on 80% of her students with C to F grades, so she can improve the average grade of the class (of course, this is assuming that the top tier 20% will be consistent with their efforts).

I love the application of Pareto Principle in personal life and career, too.

At work, when I list down 10 things I need to do for the week every Monday morning, I notice that 20% of it are those that will truly help me achieve 80% of my objectives — the rest can be postponed to another week, or can be delegated to another person who can also do it.

Most of us get anxious crossing out every single item that needs to get done in our list, but we fail to recognize which of them are really important in our lives. At work, my philosophy as a manager when it comes to prioritizing what’s important and what’s not among my tasks is to always ask the question: Am I the only person who can execute this task in the company and yield the results that I want?

If the answer is a confident no, then that means that the task can be delegated to someone else. Move on, and spend your time on something that will move your things-to-do list.

I also notice that 20% of my time at work (usually between 10am-12pm or 3pm-5pm) are my most energetic and productive times — the same reason I schedule my critical presentations to the bosses at this time so I perform at my best, and everyone is more attentive.

I read magazines and newspapers a lot, whether in print or online. When I’m after knowing the most important things of the day, I don’t spend an entire hour reading it from page one ‘til end. I spend five minutes of my time skimming the entire periodical and deciding the top 20% of the contents that I should read. This way, I don’t get stressed missing out the critical information that I need to know. The rest of the can be read later on.

I don’t have proof of this theory, but I bet that the Pareto Principle is at work in our social media connections: I bet that for most of us who have X number of Facebook friends, we’re probably interacting with only 20% of them who are our friends in real life. To date, I have around 1,200 friends on Facebook and I can confidently say that I like, comment and post messages on the walls of about 200 to 300 of them (that’s roughly 20%!).

So here's to an invisible glass of wine that I'm offering as gratitude to the Pareto Principle for making my life easier. May you be conscious of it, and apply it too in your daily life.

Do you have an 80-20 rule that you're applying or enjoying in life right now? Let's hear it!

 

This post originally appeared on Linkedin. Written by Jonathan Yabut

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