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Too Many KPIs? Try the 80/20 Rule...

by Stacey Barr, Performance Management Specialist, Stacey Barr Pty LtdTuesday, April 13, 2010

In 1897, over a century ago, an Italian economist called Vilfredo Pareto made the discovery that 80% of the wealth of a population was owned by 20% of that population. The Pareto Principle, or 80/20 rule, is a pattern of predictable imbalance that keeps popping up in all kinds of contexts ever since. For example, the Quality Movement certainly grabbed onto it, coining phrases like “80% of the problem is caused by 20% of the causes.”

Why is Pareto’s 80/20 Rules so important to us today?

The 80/20 rule is a guide for how to think about improving things. If you want something to improve, you have to change something. And with even a basic 80/20 analysis, you can find out what those “somethings” are, which will have the greatest impact.

When you know what has the greatest impact on your results, you also have clues for the kinds of performance measures to track, to support your achieving your KPI targets.

And in an age where time is scarce, and to-do lists are long, the sharper our focus can be on what matters most, the better our results will be.

How can you use the 80/20 rule in performance improvement?

If you’re not completely happy with how your work or life is going right now, or you know that there is scope to improve it, then practice asking questions like these:

  • Which are the 20% of tasks I perform that generate 80% of my output?
  • Who are the 20% of customers that generate 80% of our profitability?
  • Who are the 20% of customers that have 80% of the need for our services?
  • What are the 20% of products that generate 80% of our profitability?
  • What are the 20% of investments I make that generate 80% of the return?
  • What are the 20% of interruptions that cause 80% of my productivity problems?
  • What is the 20% of literature I read that gives me 80% of the knowledge I need?
  • Who are the 20% of suppliers that give me 80% of the goods and services I need?
  • What are the 20% of complaints that take up 80% of my complaint handling time?
  • Who are the 20% of friends & family that get 80% of my attention?

Asking questions like this can reframe what is going on in your life or work, in a way that shows you how much more influence you can have in changing things. The 80/20 rule helps focus your attention on the things that have biggest impact on the results you want in your life. And by focusing on those things, you can more easily examine how you can influence them.

How to do a simple Pareto Analysis:

When you have framed your result and its potential causes in 80/20 questions like those above, you’ve set the scope for what kind of data to collect. If you’re going to know which are the 20% of causes that produce 80% of your result, you’ll need to measure both your result, and the degree of impact of each cause.

If you’re uncertain exactly what to collect data on, try using a cause-effect diagram to map out the possibilities (that is, a fishbone diagram). Then you can measure or estimate the relative impact of each cause on your end result.

A simple bar chart or Pareto chart is a great way to display the 80/20 analysis, once you have the data. For each cause you list, against it you will have a number that represents the size of its impact on your result. It might be dollars or hours or incidents, depending on your result. Chart the data and look for the tallest 20% of bars in the chart that visually account for about 80% of your measure.

A useful note: it won’t always be 80/20.

Sometimes you’ll find patterns that are 99/1, or 80/10 or 70/30. That’s fine. The point is more about the predictability of imbalance, that you’ll rarely find 50% of the causes producing 50% of the result.

About the author:

Stacey Barr is a specialist in organisational performance measurement, helping corporate planners, improvement officers, business analysts and performance measurement officers confidently facilitate their organisation to create and use meaningful performance measures with lots of buy-in.
Sign up for Stacey’s free email tips at www.staceybarr.com/202tips.html and receive a complimentary copy of her renowned e-book “202 Tips for Performance Measurement”.

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