The traps of the Pareto Principle

Everyone knows the Pareto Principle in its simplified form: 80% percent of our results are generated by only 20% of our effort. Conclusion: Get rid of the other 80% producing few results. Instead, invest more time in areas of high outcome.

This is a basic piece of coaching and consulting advice that has a major impact on profitability and wealth.

But beware of the Pareto Principle:

Some areas require at least 95% perfection in results—if not more—even if the investment is significant. Consider the following examples:

• Road signals of which one fifth (20%) is missing do not fulfill their purpose of helping the driver find the way. You need a sign at EACH junction; otherwise, the signals become useless overall. Who of you got (like me) already lost in a foreign city because the local police applied–unconcisously–the 80/20 rule?
• Customer focus must be undivided. If you disappoint customers during 20% of the interactions, you will lose your clients, no matter how well you did the other 80% of the time. The same applies to prospective clients: EACH interaction matters!
• Security-related processes and products should be close to 100% perfect.

How do you apply the Pareto Principle correctly?

First, define the situations in which you need 95% or higher quality as well as those in which 80% is sufficient. Then, eliminate the efforts of the obsolete 20% and streamline the processes for the situations requiring 95%.

Many people and organizations confuse those two categories and wonder why their profitability is fluctuating or why they are losing both customers and employees.

Master the Pareto Principle and you will succeed. Adopt it wrongly and you will fail.

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This post is from our Friday noon memo #89. Interested in regular updates? Sign up here.
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