The Pareto Principle, named after Italian economist Vilfredo Pareto, simply states that there is a disproportionate return across a range of activities. There are a ‘vital few’ that produce significantly more value than all the remaining activities. This principle was first identified by Pareto in 1906 when he realized that 80% of the wealth in Switzerland was owned by 20% of the people. Since then this general truth has been observed in many different areas of life including managing talent in the business setting.
This simple truth is the foundation of much of the best, most valuable, work in the area of performance management – in business as well as all other activities where performance is a key differentiator such as professional sports. While very few people disagree with the principle (I am yet to find something that everyone agrees with regardless of the topic!), it is shocking how rarely it is actually effectively utilized. I think a major reason for that is simply that people don’t really understand how powerful it is.
First, let’s do a little math so that we can understand the power of this principle. Often times, I am brought into organizations looking to increase financial performance 5% to 10%. Well the Pareto Principles states that 20% of the people in an organization create 80% of the value. Okay, so if 20% create 80% then the remaining 80% create the remaining 20%. Apply a little basic algebra – a step very people actually do – and you realize those 20% are 16 times more productive than the remaining 80%! That’s 1600% more valuable, not 5% or 10%, but 1600%! (Have I said it enough yet?) Maybe it might be worth focusing a little attention to understand how you can apply this within your organization.
That’s why differentiating your people can make a HUGE difference in your business results and financial returns. For great performing organizations, they take this further and differentiate key, high-value roles. When you understand that this principle applies to BOTH people AND roles you realize that a little effective application of this one principle can provide returns from 16 to 256 times standard performance. That’s 1600% to 25,600% improvement.
Now it is important to understand how to effectively apply this principle to get these returns – it requires a change in your thinking. (And you can’t accomplish that from just reading one article about it.) But learning more about how it can be applied in your organization, and the changes that must be made to accommodate it, are well worth your time and energy. Unless searching for an incremental 1% or 2% is the best you think you need. But remember, your competitors may already be working to apply this to their advantage hoping you just keep doing what you’ve always done.
