Pareto's Principle -- "the 80:20 rule"
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indwes.edu
"A minority of input produces the majority of results. "
"The 80:20 rule was originated by Vilfredo Pareto, an Italian economist who studies the distribution of wealth in a variety of countries around 1900. He discovered a common phenomenon: about 80% of the wealth in most countries was controlled by a consistent minority -- about 20% of the people. Pareto called this a "predictable imbalance." His observation eventually became known as either the "80:20 rule" or "Pareto's Principle."
The 80:20 rule has been expanded far since its first economic use. While one might quibble about the 80% or 20% (it is sometimes 60:40 or 90:10) the insight is broadly applied to leadership and management. The "80:20 rule" has become one of the best known "leadership shorthand terms" reflecting the notion that most of the results (of a life, of a program, of a financial campaign) come from a minority of effort (or people, or input).
To what does 80:20 apply in church leadership or voluntary organizations? Try these for starters:
- 80% of the work is usually done by 20% of the people .
- 80% of the problems are usually caused by 20% of the people.
- 80% of the value of my day is often produced by 20% of the activity .
- 80% of my mentoring multiplication will likely come from 20% of the mentors .
- 80% of our new converts will probably come from 20% of the programs.
- 80% of the quality can be gotten in 20% of the time -- perfection takes 5 times longer.
- 80% of the giving in a capital campaign often comes from 20% of the gifts .
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The 80-20 principle is one of the most powerful tools for management life. I see so much time waisted to get the last details on the table, while the first estimate was very close. Intuition (accumulation of past experiences) guides us to know the answers to most of every day problems.
A more "scientific" explanation: Pareto developed the principle based on the distribution of income within a country. A few people have a lot of money, a lot of people have much less. So it is a measurement of concentration. The opposite would be that all people have the same income. Or that all your time is equally well spend.
Forget about time management courses. Just cut out all the waste. Less meetings. Shorter meetings. Less phonecalls. Less viewing daily sales. Concentrate on the core points and the core people. Todays software, erp, crm and datawarehouses produce an everlasting stream of data. One of my professors said, just forget about the data. Make once a very detailled analysis of your business, then concentrate on managing the input. What are the main elements determining the success of your business. Manage them well. Monthly figures are a result of actions. A RESULT. If you know the relation between the actions and the results, spend very few time on calculating and discussing detailled results and focus all your time on the action. As you know, all results are just estimates, a picture of the situation. Accounting rules define how to book, when to book, but still you can present the results like you want.
Focusing on input and not on results is very effective in investing. When we first read or heard about Dell they told us that Dell was producing to order, avoiding price erosion and stock, and got paid by its customers 30 days before they paid their suppliers. That should have been enough to buy a bunch of their shares. They told us that in the early '90s. We had six years to buy. Stock went up when people started to see the results: as recent as 1996.
siliconinvestor.com
I never had Dell shares. And I felt stupid. Now, with INKT and GNET I feel just fine. I'll wait a couple of years.
If you want to know some more about the person, who's name I'm using, let me know. Basicly, the Pareto principle is a rule of observation. Not a law. Another "rule of observation" is that novice investors tend to overreact, up and down, hype and dips.
Regards,
Pareto (with respect for this Italian) |
