The Best-Kept Secret of Doing More with Less: Rediscovering Applications of Pareto Analysis
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Editor's Note
Every internal learning organization must practice what has become known as turnaround management. The purpose? To get more out of existing resources. This requires getting rid of things that don't work, never worked or have outlived their usefulness and capacity to contribute.
This is easier said than done. Here's some useful Peter F. Drucker advice: Don't start out with what should be abandoned. Start out by thinking through what should be strengthened and built. Don't start out by trying to save money. Start out by trying to build performance.
Then, systematically identify what activities and programs should be sloughed off. This will free up monies and talent to work on high-payoff new opportunities. Pareto analysis is one of several powerful diagnostic tools to guide you in this process.
Introduction
Most alert and thoughtful senior training executives are by now familiar with the need to achieve more with less. Even a handful of uniquely cosmopolitan up-to-date executives have familiarized themselves with what has become known as the 80/20 principle and/or Pareto's law.
Yet, in a recent informal (unscientific) survey of such executives, we found few who use Pareto's law in any strategic way whatsoever, and pitifully few in any kind of tactical way.
Peter F. Drucker rendered explicit the interrelationship between and among three distinct concepts, namely: (1) abandonment; (2) concentration; and (3) Pareto's law (a.k.a. The 80/20 principle) more than 50 years ago.
Unfortunately, Drucker's work in this area has remained—like so many fascinating theories in management practices—a remarkably durable but underemployed methodology to achieve more with less.
Abandonment and concentration, Drucker reminded us, are opposite sides of the same coin. Simply put, abandoning unproductive and obsolete activities frees up resources (i.e., monies and people) to concentrate on high pay-off result areas. However, deciding what to abandon is never easy.
We all need a framework or methodology to help us decide what to stop doing ... and to pinpoint areas we should concentrate efforts and resources.
Pareto analysis is one of many tools used to identify activities, programs, products and services that should be considered candidates for abandonment/de-emphasis.
Pareto's Principle
One of the best books ever written about the Pareto Principle is Richard Koch's The 80/20 Principle. It details how systematic and predictable lack of balance appears in data relating to a wide range of activities in both life and management activities.
Here's an excerpt from Koch's book:
"The pattern underlying the 80/20 Principle was discovered in 1897 by the 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.
"So what did Pareto discover? He happened to be looking at patterns of wealth and income in 19th-century England. He found that most income and wealth went to a minority of the people in his samples."
Koch explains that, in essence, Pareto found that 20 percent of the population enjoyed 80 percent of the wealth in all the countries studied. Indeed, that's what really excited Pareto.
This pattern of imbalance was repeated consistently whenever he looked at data referring to different time periods or different countries.
It took many years for others to discover that Pareto's finding could be extended to all kinds of resources. In most situations, a pattern of imbalance with respect to efforts and results is a near-certainty.
"In 1949, George K. Zipk, a professor at Harvard, discovered the 'Principle of Least Effort,' which was actually a rediscovery and elaboration of Pareto's principle..."
Ever so slightly paraphrasing Koch's summary of Zipk's principle:
Resources (people, products, time, knowledge, physical assets or anything else that can be made more productive) tends to arrange themselves so that approximately 20 percent to 30 percent of any resource accounts for 70-80 percent of the activity related to that resource.
What does this really mean? More results can be squeezed out of existing resources. It's a good bet that an organization's resources are not as productive as they could be.
An Example
Drucker provided an excellent example of how nurses in a major hospital were asked a few questions in an employee survey:
- What is your task?
- What should it be?
- What should you be expected to contribute?
- What hampers you in doing your task, and should these obstacles be eliminated?
According to Drucker:
"The nurses were sharply divided as to what their task was, with one group saying ‘patient care’ and another saying ‘satisfying physicians.’ However, they were in complete agreement on the things that made them unproductive.
"They called them ‘chores:’ paperwork, arranging flowers, answering the phone calls of patients' relatives, answering the patient bells and so on.
"All—nearly all—of these could be turned over to a non-nurse floor clerk, [who are] paid a fraction of a nurse’s pay.
"When the nurses were freed of chores, their productivity nearly doubled, as measured by the time at the patients’ bedsides.
"Further, patient satisfaction more than doubled and turnover of nurses (which had been catastrophically high) almost disappeared, all within four months."
The point? Resources have a tendency to decline in productivity. But, as Drucker so clearly illustrates, the way to get more output from exisiting resources is to make the resource "work smarter."
Making resources productive is the specific job of management. In this case, a workplace survey revealed that a large percentage of the nurses' time was spent in non-nursing activities.That percentage had to be favorably altered—a greater percentage of nursing time had to be directed toward the results desired.
Zipk's principle is valid. This means we have to constantly improve the productivity of resources in existing employments. "We know that we need to work on the productivity of each of the factors of production: capital, natural resources, time and knowledge."
Why? Because it's near-certain that the efforts-to-results ratio with respect to most resources is predictably unbalanced.
Juran's Contribution
The other pioneer of the 80/20 Principle was the quality guru Joseph M. Juran. Indeed, he coined the phrases "Pareto Principle" and the "Rule of the Vital Few."
According to Juran, in any relevant data set a small number of elements will be responsible for the preponderant portion of results. In terms of results the vital few within the configuration or data set will always take precedence over the trivial many.
For example, if we assume there are five frequently cited reasons for customer complaints, one reason (20 percent of the reasons) probably accounts for 80 percent of the complaints. Efforts should be concentrated on the one reason causing the majority of complaints.
Still another example: While a manufacturer makes 20 different products, five of those products account for 75 percent of its customers complaints.
And still another example: While there may be 12 distinct steps in the process of transferring a patient out of an intensive care unit into a standard bed, two of those steps account for 82 percent of the total time in the total process.
Lesson Learned So Far
Always look for the predictable imbalance. Breakdown the numbers. Disaggregate the data.
Expect the unexpected. Expect 20 percent to lead 80 percent... and 80 percent to lead to 20 percent. Always look for the powerful vital few. It's bound to be there.
This will enable you to spot the important things. Accept the reality that with respect to causes, inputs and efforts the majority have little impact. But, rather, a small minority of causes, inputs and efforts will have the major, dominant impact.
Drucker's Summary of the Pareto Principle
Drucker repeatedly demonstrated how the application of Pareto's Law could be used in diagnosing patterns of potential misallocation of resources.
"Business enterprise is not a phenomenon of nature but one of society. In a social situation, however, events are not distributed according to a ‘normal distribution’ of a natural universe...
"In a social situation a very small number of events at one extreme—the first 10 percent to 20 percent at most—account for 90 percent of all results; whereas the great majority of the events accounts for 10 percent or so of the results.
"This is true in the marketplace: A handful of large customers out of many thousands produce the bulk of orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on.
"It is true of sales efforts: A few salespeople out of several hundred always produce two-thirds of all new business. It is true in the plant: A handful of production runs account for most of the tonnage.
"It is true in research: The same few people in the laboratory are apt to produce nearly all the important innovations.
"It holds true for practically all personnel problems: The bulk of grievances always comes from one group of employees (for example, from the older, married women or from the clean-up people on the night shift), as does the great bulk of absenteeism, of turnover, of suggestions under a suggestion system and accidents..."
Predictable Imbalances Have Important Implications
In short, Drucker, Zipk, and Juran observed that aggregate data misinforms, misdirects and misleads. It's a near-certainty that there's an imbalance present between efforts and results.
Every manager, to be effective, must assume an imbalance exists with respect to resource allocation. And must work hard to incrementally change the ratio.
The relationship between efforts and results are generally in a state of imbalance. The imbalance may be 65/35, 70/30, 75/25, 80/20 or 99/1, or any set of numbers in between.
The key is to alter the ratio between effort and results. For example, if a manager could change the percentage proportion from 90-10 to 60-40, 70-30 or even 80-20, misallocation could be reduced and results improved.
To be specific, if 10 percent of the salesforce is contributing 90 percent of the results and the other 90 percent of the salesforce is producing most of the cost, then the elimination of marginal performers and improvement of the mediocre performers should be a priority commitment.
Eliminating non-productive efforts, that is, abandonment will enhance performance and make resources more productive.
To Summarize
Improving productivity requires abandoning things that don't work... never worked... or have lost their ability to contribute to results in performance.
It also requires concentrating on the things that do work—the things that produce results—or the things that improve the organization's ability to perform.
Economic results, Drucker reminded us, require efforts be concentrated on the fewest number of activities that are capable of producing the bulk of positive business results.
In making a distinction between the vital few and the trivial many, management can improve its asset management by making its capital work more effectively. The more the Pareto Principle is explored, the greater the relevance to improving the productivity of all resources.
Drucker frequently mentioned—indeed, emphasized—that:
"In every industry there are institutions that operate at an essentially higher productivity level than the average... What makes one company stand out and lead in any one industry is that it operates at about twice the average productivity of its industry..."
Most of today's managers have grown up in a period of rapid economic growth. Productivities have become endangered because they have been neglected.
In many organizations, to reverse the trend in productivities is a major managerial task. It requires abandonment of obsolete and unproductive activities. It requires focusing resources on what works.
It requires, among other tools and techniques, systematic application of the Pareto Principle.
