For those in charge, there are usually lots of decisions to be made. The question is, which should be tackled first? To help answer that question, many business leaders conduct a Pareto analysis. A Pareto analysis helps prioritize decisions so leaders know which ones will have the greatest influence on their overall goals and which ones will have the least amount of impact.
The Pareto analysis is also known as the 80/20 rule because it is based on the idea that 80 percent of a project's benefit can come from doing 20 percent of the work. Conversely, 80 percent of a situation's problems can be traced to 20 percent of the causes.
According to the website Better Explained, the technique is named after Italian economist Vilfredo Pareto, who observed that 80 percent of Italy's wealth belonged to only 20 percent of the population.
"The Pareto Principle is the observation (not law) that most things in life are not distributed evenly," Better Explained writes on its website.
Among the examples they give include:
- 20 percent of the input creates 80 percent of the result
- 20 percent of the workers produce 80 percent of the result
- 20 percent of the customers create 80 percent of the revenue
- 20 percent of the bugs cause 80 percent of the crashes
The Process Excellence Network points to two main benefits of using a Pareto analysis. The first is that it can categorize and stratify such things as errors, defects, delays, customer complaints or any other measures of the resulting quality of a business's process so that leaders can identify different classes or types of problems.
Second, is that it graphically displays the results in a Pareto chart or Pareto diagram so that the significant few problems emerge from the general background.
How to make a Pareto chart
While there are several different ways to conduct a Pareto analysis, they tend to revolve around the same guiding principles. According to the website Mind Tools, the six steps to conducting a Pareto analysis are:
- Identify and list problems: Write a list of all of the problems that you need to resolve.
- Identify the root cause: For each problem, identify its fundamental cause.
- Score the problems: The scoring method use will depend on the sort of problem that needs to be solved. If the problem revolves around a business trying to improve profits, then the scoring might center on how much each problem is costing them. Or, if they are trying to boost customer satisfaction, they might score the problems on the number of complaints that would be eliminated if the problem were solved.
- Group the problems: Group the problems by the root cause.
- Add the scores: Add up the scores for each cause group. The group with the top score is should be the highest priority, while the one with the lowest score should be the lowest priority.
- Action: Start tackling the causes of the problems. Deal with the top-priority problem, or group of problems, first.
For those that want a graphical representation of the problems, the Project Excellence Network advises to divide each problem's score by the grand total of all of the scores to get a percentage. Decision makers should then draw a chart with a horizontal axis and two vertical axes. The left vertical axis should be marked in increments from zero to the grand total of all the problem scores. On the other side, the right vertical axis should be marked in increments from zero to 100 percent.
Next, leaders should construct a vertical bar diagram, with the highest percentage score on the left and lowest on the right. According to the Project Excellence Network, the height of each bar should correspond with the value on the left axis and the percentage of the total on the right axis.
Finally, to figure out what percentage of the total problems will be solved when more than one are addressed, a line graph should be added to the top.
"Beginning at the left zero point, plot a line showing the cumulative percentage total reached with the addition of each problem classification," the Project Excellence Network writes on its website. " The line should end at the 100 percent mark on the right axis."
Pareto analysis example
For businesses, there are wide array of ways to use Pareto analyses to their advantage. On example the website Bright Hub PM points to is how to improve customer service at a call center. The first step was to survey customers to find out why they were unhappy with the call center's service.
After getting the response back, the call center then divided the information up by complaint category, which included: "too long on hold," "no evening or weekend staff," "not knowledgeable," "not courteous," "transferred too many times," "could not locate file," "no phone payment options," "hard to understand representative," and "charged more than promised."
They then totaled the number of complaints in each category and figured out a percentage of each. They then figured out the cumulative percentage of the categories by adding them together. Based on the data, it became clear that "too long on hold," "no evening or weekend staff" and "not knowledgeable" accounted for more than 75 percent of the total complaints.
In light of the analysis, it was easy to determine that call center needed to concentrate their efforts on those three complaints in order to make significant progress toward improving their overall customer service.
Other examples can be viewed online at: