The 80/20 Rule and How It Can Help Your Business

08/08/2014     

More commonly known as the 80/20 rule, the Pareto Principle has widespread applications across many different fields such as mathematics, economics, health, and business. So what exactly is it, and how can it benefit your organization?

Several variations of the 80/20 rule apply to multiple business areas from project management and quality control to time management and leadership. The 80/20 rule states that 20% of our efforts affect 80% of the results, or that ‘20% of X is responsible for 80% of Y’. In 1906, Italian economist Vilfredo Pareto observed that 80% of land in Italy was owned by just 20% of the population. In 1937, American engineer Dr. Joseph Juran - recognized for his research in quality management - identified this ratio in other areas of interest, as well, and named it the Pareto Principle. Seeing universal applications, he first described it as “the vital few and trivial many”, but later changed it to “the vital few and the useful many” so as not to exclude opportunities for improvement within the “many”.

Business Applications

This pattern of distribution is found true in the business world in numerous ways. For example: 20% of your customers account for 80% of your sales, 20% of inventory items take up 80% of warehouse space, 20% of vendors make up 80% of your sales, 20% of your sales force is responsible for 80% of your sales, and so on. On the flip side, 20% of bugs cause 80% of your site’s problems, and 20% of defects affect 80% of inventory. Analyzing this ratio within one’s business can help identify where best to spend time, resources, marketing, research, and hiring efforts - not to mention highlight problem areas and those opportunities for improvement.

Leadership

So how do you use the 80/20 rule as a manager?At Zappos, managers and team leads are encouraged to spend 20% of their time hanging out and socializing with their team. “If you take the time to get to know your employees, I mean really get to know them, you will be able to become a mentor,” says Marcela Gutierrez, Manager of Zappos Insights and New Hire Training. “The difference between a mentor and a manager is that you will know how to coach them and help them achieve not only professional but personal goals. They will also work harder for you because they will trust you 100%. There’s nothing better than to have someone you can trust and come to for anything.” Taking the time to get to know each other builds trust and team unity where both leaders and team members can learn from each other.

An Environment of Innovation

The 80/20 rule not only applies to leadership at Zappos, but to the entire company, as well. All employees are encouraged to participate in company-sponsored events and work on passion projects. While the application of this rule varies from department to department, the time is there to be used. One example of how 20% time is used is the Zappos Development Department’s quarterly hackathons. Employees take a few days to work on their idea, and completed projects are then shared with the entire company to vote on. Winning submissions are implemented and projects range from developing a back-end tool to one that is more customer-facing. There’s always a buzz of excitement at each hackathon in seeing such inspiring innovation and creativity!

Time Management

"All improvement happens project by project and in no other way." -Joseph Juran

When you think of your typical work day, how is it broken out? Out of 8 hours, during how much of that time do you feel truly productive? If applying the 80/20 rule, then roughly only 1.5 hours of our day are really impactful, which can be both insightful and disheartening! But when one adds up all the time spent in meetings, emails, coffee breaks, distractions, phone calls, procrastinating, and lunches, it doesn’t seem so far-fetched, after all. Using the 80/20 rule can help employees prioritize the most important task for the day and set aside a 20% block of time to complete it. Limit distractions by shutting off your email and avoiding social media time sucks. Focusing that time on your most pressing projects can make a world of difference to your level of productivity and sense of accomplishment each day.

Whether it’s prioritizing project management, building teamwork, or promoting creativity, the 80/20 rule has practical applications for every part of an organization.

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Author: Erica Spelman

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