What is the best way to explain Pareto principle to an SME?

Marieta

decent business analysis is always difficult for SME's

They often don't have the time and it can be difficult to predict the financial benefits in advance. There's also the problem that they may not have the data for such analysis - or at least in a suitable format.

If it's a law firm you could start by asking staff/partners - where does our income come from? ie do we get 80% (or thereabouts) of our income from the top 20% of cases we deal with?

The answer from staff is usually - we've no idea! 

You could then try some quick analysis on a sample of cases to analyse where the firm's income comes from and the implications of this

You can also factor in staff time spent on such cases and correlate this against income.

Hope that helps

Hi Marieta:

Anyone can use Pareto's Principle.

Originally, the Pareto Principle referred to the observation that 80% of Italy’s wealth belonged to only 20% of the population.

More generally, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It can mean all of the following things:

• 20% of the input creates 80% of the result
• 20% of the workers produce 80% of the result
• 20% of the customers create 80% of the revenue
• 20% of the bugs cause 80% of the crashes
• 20% of the features cause 80% of the usage
• And on and on…

But be careful when using this idea! First, there’s a common misconception that the numbers 20 and 80 must add to 100 — they don’t!

20% of the workers could create 10% of the result. Or 50%. Or 80%. Or 99%, or even 100%. Think about it — in a group of 100 workers, 20 could do all the work while the other 80 goof off. In that case, 20% of the workers did 100% of the work. Remember that the 80/20 rule is a rough guide about typical distributions.

Also recognize that the numbers don’t have to be “20%” and “80%” exactly. The key point is that most things in life (effort, reward, output) are not distributed evenly – some contribute more than others.

Life Isn’t Fair

What does it mean when we say “things aren’t distributed evenly”? The key point is that each unit of work (or time) doesn’t contribute the same amount.

In a perfect world, every employee would contribute the same amount, every bug would be equally important, every feature would be equally loved by users. Planning would be so easy.

But that isn’t always the case:

The 80/20 rule observes that most things have an unequal distribution. Out of 5 things, perhaps 1 will be a good thing. That good thing/idea/person will result in majority of the impact of the group [removed] key point is that most things are not 1/1, where each unit of “input” (effort, time, labor) contributes exactly the same amount of output.

So Why Is This Useful?The Pareto Principle helps you realize that the majority of results come from a minority of inputs.Knowing this, if…20% of workers contribute 80% of results: Focus on rewarding these employees.20% of bugs contribute 80% of crashes: Focus on fixing these bugs first.

20% of customers contribute 80% of revenue: Focus on satisfying these customers.The examples go on. The point is to realize that you can often focus your effort on the 20% that makes a difference, instead of the 80% that doesn’t add much.In economics terms, there is a diminishing marginal benefit. This is related to the law of diminishing returns: each additional hour of effort, each extra worker is adding less “oomph” to the final result. By the end, you are spending lots of time on the minor details.The point is to put in the amount of effort needed to get the most bang for your buck — it’s usually in the first 20% (or 10%, or 30% — the exact amount can vary). In the planning stage, it may be better to get 5 fast prototypes rather than 1 polished product.

Concluding Thoughts:This may not be the best strategy in every case. The point of the Pareto principle is to recognize that most things in life are not distributed evenly. Make decisions on allocating time, resources and effort based on this:

•  Instead of 1 hour on a rough draft for an article you may write, spend 10 minutes on 6 outlines for a paper / blog article and pick the best topic.
• Instead of investing 3 hours on a website, spend 30 minutes and create 6 different template layouts.
• Rather than spending 3 hours to read 3 articles in detail (which may not be relevant to you), spend 5 minutes glancing through 12 articles (1 hour) and then spend an hour each on the two best ones (2 hours).

These techniques may or may not make sense – the point is to realize you have the option to focus on the important 20%.Lastly, don’t think the Pareto Principle means only do 80% of the work needed. It may be true that 80% of a bridge is built in the first 20% of the time, but you still need the rest of the bridge in order for it to work. It may be true that 80% of the Mona Lisa was painted in the first 20% of the time, but it wouldn’t be the masterpiece it is without all the details. The Pareto Principle is an observation,not a law of nature.

When you are seeking top quality, you need all 100%. When you are trying to optimize your bang for the buck, focusing on the critical 20% is a time-saver. See what activities generate the most results and give them your appropriate attention.Simple Example: I use this principle every day. It sets all my priorities, so I’m not “spinning my wheels” knowing what to do next. When I scan my e-mails, I only look for those 20% that are 80% of all e-mails I receive, and concentrate on those e-mails first.This 80/20 principle can be used by any one for anything in any type of business or personal endeavor.

The Pareto Principle has many applications in quality control. It is the basis for the Pareto diagram, one of the key tools used in total quality control and Six Sigma.

In PMBOK, Pareto ordering is used to guide corrective action and to help the project team take steps to fix the problems that are causing the greatest number of defects first.

Here is a simple example of a Pareto diagram, using sample data showing the relative frequency of causes for errors on websites. It enables you to see what 20% of cases are causing 80% of the problems and where efforts should be focussed to achieve the greatest improvement. In this case, we can see that broken links, spelling errors and missing title tags should be the focus.