Monday, January 5, 2009

Vilfredo Pareto, and the Law of the Vital Few

Vilfredo Pareto was an Italian economist living in the early part of the 20th century. He made the first observation that has come to be known as the Pareto Principle, the 80 / 20 rule, or the Law of the Vital Few. In its earliest form, it said, “You know, 80% of the land in Italy belongs to 20% of the people.”

Now it has been applied to many areas, and is considered a universal economic principle:
1. 20% of customers account for 80% of sales volume
2. 20% of customers account for 80% of profits (not necessarily the same customers!)
3. 20% of the people own 80% of the wealth
4. 20% of cars produce 80% of the pollution
5. 20% of sales campaigns produce 80% of the results
6. 20% of errors produce 80% of complaints
7. 20% of your work produces 80% of your results

The second to last point is interesting if you work in sales, service, or manufacturing – and that’s most of us, isn’t it? It means that if you can determine which small part of your job causes most of the problems, you can streamline yourself greatly with a minimal amount of effort. By fixing 1/5 of your “challenges”, you fix 4/5 of your losses. Now that’s leveraging your time! And, once you’re there, it means there’s not much point to working on the other 80%.

And the last one is the big one. As we’ve just started a new year, you’re probably looking at several areas you plan to improve. You have resolutions and goals that you’d like to meet in the coming year. But what if you could pare down your goals to a few steps most likely to get you where you want to be?

80/20 and You
Let’s start with a pretty easy application – your To Do list. Take it out, and look it over and pick out the 1 in 5 things that will give you the biggest returns. Focus on those, and forget the rest. I know this seems extreme, but it works. Once you have your top 20% done, you can re-work your list and get into the next part, or maybe new things will come to the top of your list.

Keep in mind this is a rule of thumb. It won’t always work out – maybe you have eight things on your To Do list. Or you see that 40% of you work creates most of your productivity. You will have to determine how it fits in your life. Here is an example on how to apply it to your finances. The principle is critical though: a minority of your efforts create most of your results. This demonstrates leverage and inverse leverage – you don’t want to spend half your time getting 10% results!

So make this a core philosophy, and streamline your life. A little efficiency at the right place can make a huge difference!

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