The Pareto Principle

This is the idea that most effects come from a few causes and is more commonly known as the 80-20 rule. If you do the math - $10 in sales generated by ten customers - two customers generated $8 - eight customers generated $2 - one of the two are sixteen times more valuable than one of the eight. Of course it is never exactly eighty-twenty but a significant clumping of causes-effects always holds.


This has played out dramatically on a large scale the last few years. Best Buy and Circuit City which were very similar in size and market with precisely the same basic product - consumer electronics. Best Buy took the appeal to everyone approach - address all the customers. Best Buy lowered the price of its products by decreasing service personnel. Circuit City applied the Pareto Principle, targeted the sixteen times more valuable twenty percent which they called angels, and neglected the eighty percent they called devils. Circuit City catered to angels (people more concerned about value than price) by having knowledgeable personnel which help customers choose the right product and get the most from it and neglected devils (individuals so fixated on price that they bought only loss leader items and often returned those hoping to pick it up as open box) by not lowering their prices. Best Buy's policy of addressing all customers, aka all causes, actually drove away the angels - the twenty percent seeking value who generate eighty percent of revenue. Best Buy copied the practice and was able to drive its rival out of business recently by managing its resources better.


The same principle applies to project management - twenty percent of the project activities produce eighty percent of the results. Insisting on addressing all the causes, in project terms performing all the ceremonies and producing all the documents, is not only silly but outright debilitating. The chances are good (about eighty percent) that processes carried forward from the past are not only of low value but crowd out activities sixteen times more valuable: if you are performing a ceremony you are not doing something else. I encourage everyone to apply the Pareto Principle to improve the results of their projects: of course adopt well thought out beneficial processes but remain ever mindful that you might be stifling or driving out that twenty percent of activity which produces eighty percent of the results.