Pareto Analysis

Using the 80:20 Rule to Prioritize

Pareto Analysis

Avoid the "law of diminishing returns."

© iStockphoto/tom_fewster

Imagine that you've just stepped into a new role as head of department. Unsurprisingly, you've inherited a whole host of problems that need your attention.

Ideally, you want to focus your attention on fixing the most important problems. But how do you decide which problems you need to deal with first? And are some problems caused by the same underlying issue?

Pareto Analysis is a simple technique for prioritizing possible changes by identifying the problems that will be resolved by making these changes. By using this approach, you can prioritize the individual changes that will most improve the situation.

Pareto Analysis uses the Pareto Principle – also known as the "80/20 Rule" – which is the idea that 20 percent of causes generate 80 percent of results. With this tool, we're trying to find the 20 percent of work that will generate 80 percent of the results that doing all of the work would deliver.

Note:

The figures 80 and 20 are illustrative – the Pareto Principle illustrates the lack of symmetry that often appears between work put in and results achieved. For example, 13 percent of work could generate 87 percent of returns. Or 70 percent of problems could be resolved by dealing with 30 percent of the causes.

How to Use the Tool

Step 1: Identify and List Problems

Firstly, write a list of all of the problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, helpdesk logs and suchlike, where these are available.

Step 2: Identify the Root Cause of Each Problem

For each problem, identify its fundamental cause. (Techniques such as Brainstorming  , the 5 Whys  , Cause and Effect Analysis  , and Root Cause Analysis   will help with this.)

Step 3: Score Problems

Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve.

For example, if you're trying to improve profits, you might score problems on the basis of how much they are costing you. Alternatively, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem.

Step 4: Group Problems Together By Root Cause

Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put these in the same group.

Step 5: Add up the Scores for Each Group

You can now add up the scores for each cause group. The group with the top score is your highest priority, and the group with the lowest score is your lowest priority.

Step 6: Take Action

Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of problems, first.

Keep in mind that low scoring problems may not even be worth bothering with - solving these problems may cost you more than the solutions are worth.

Note:

While this approach is great for identifying the most important root cause to deal with, it doesn't take into account the cost of doing so. Where costs are significant, you'll need to use techniques such as Cost/Benefit Analysis  , and use IRRs and NPVs   to determine which changes you should implement.

Pareto Analysis Example

Jack has taken over a failing service center, with a host of problems that need resolving. His objective is to increase overall customer satisfaction.

He decides to score each problem by the number of complaints that the center has received for each one. (In the table below, the second column shows the problems he has listed in step 1 above, the third column shows the underlying causes identified in step 2, and the fourth column shows the number of complaints about each column identified in step 3.)

# Problem (Step 1) Cause (Step 2) Score
(Step 3)
1 Phones aren't answered quickly enough. Too few service center staff. 15
2 Staff seem distracted and under pressure. Too few service center staff. 6
3 Engineers don't appear to be well organized. They need second visits to bring extra parts. Poor organization and preparation. 4
4 Engineers don't know what time they'll arrive. This means that customers may have to be in all day for an engineer to visit. Poor organization and preparation. 2
5 Service center staff don't always seem to know what they're doing. Lack of training. 30
6 When engineers visit, the customer finds that the problem could have been solved over the phone. Lack of training. 21

Jack then groups problems together (steps 4 and 5). He scores each group by the number of complaints, and orders the list as follows:

  1. Lack of training (items 5 and 6) – 51 complaints.
  2. Too few service center staff (items 1 and 2) – 21 complaints.
  3. Poor organization and preparation (items 3 and 4) – 6 complaints.
Pareto Analysis Example

As you can see from figure 1 above, Jack will get the biggest benefits by providing staff with more training. Once this is done, it may be worth looking at increasing the number of staff in the call center. It's possible, however, that this won't be necessary: the number of complaints may decline, and training should help people to be more productive.

By carrying out a Pareto Analysis, Jack is able to focus on training as an issue, rather than spreading his effort over training, taking on new staff members, and possibly installing a new computer system to help engineers be more prepared.

Key Points

Pareto Analysis is a simple technique for prioritizing problem-solving work so that the first piece of work you do resolved the greatest number of problems. It's based on the Pareto Principle (also known as the 80/20 Rule) – the idea that 80 percent of problems may be caused by as few as 20 percent of causes.

To use Pareto Analysis, identify and list problems and their causes. Then score each problem and group them together by their cause. Then add up the score for each group. Finally, work on finding a solution to the cause of the problems in group with the highest score.

Pareto Analysis not only shows you the most important problem to solve, it also gives you a score showing how severe the problem is.

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Comments (8)
  • Dianna wrote Over a month ago
    Well I think you are now the rudder... you can only start from where you are and move forward.

    I'd start with the KPIs - it's fundamental that you know what you need to be monitoring and than your team knows what is most important. The old adage, "what gets measured, gets done" has a lot of truth so letting your people your expectations and outlining clearly how those expectations can/will be measured is key.

    As you establish this foundation you can start to build in other improvement projects and tools. I think though that you will want to remain focussed on your top priorities so you don't get sidetracked. Use the rudder right now to stabilize and set your course. Once you are confident you are moving in the right general direction then you can start introducing other measures that will bring more and more efficiency and productivity.

    Dianna
  • djeaster wrote Over a month ago
    So what do you do in a situation like I am facing where you don't have any KPI's to work with? A department that has been a rudderless ship...
  • Dianna wrote Over a month ago
    Hi DJ - welcome to the forums! And thanks for jumping in with answers for Winnie.

    I think you can coordinate these results with the work you are doing on KPIs as well. Areas of concern can be balanced against performance indicators and that will give you a built in means of monitoring progress and improvement.

    Sounds like you have an interesting project on your hands so please do keep us posted.

    Dianna
  • djeaster wrote Over a month ago
    Start by asking the people in the department, customers, or people in other departments how you can improve service. Maybe callbacks are slow, maybe orders aren't getting entered correctly and causing issues with fulfillment. These questions will raise a list of issues that need to be addressed. Then you take a look at the data that will give you a picture of the related activity. Then run your analysis against that data.

    DJ
  • winnie_limhuiye wrote Over a month ago
    Hi DJ,

    I would like to know where to start? What is my key focus area to achieve quick wins.

    Tx
    Winnie
  • djeaster wrote Over a month ago
    First, you have to identify what issues you are trying to resolve. Or, are you trying to determine what issues exist? You have to determine what you want to achieve from your analysis, otherwise, you are doing analysis for the sake of doing analysis.

    DJ
  • winnie_limhuiye wrote Over a month ago
    Hi There,

    How should I use Pareto Analysis on a new sales and operations department who run a outbound sales campaign? Or rather, how should I start and what is my focus area?

    Secondly, what about the existing service support department with senior consultant or support staff.

    Thanks,
    Winnie
  • James wrote Over a month ago
    Hi Everyone

    We’ve given this popular article a review, and the updated version is now at:
    http://www.mindtools.com/community/page ... TED_01.php

    Discuss the article by replying to this post!

    Thanks

    James

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