Open Source Leadership by Rajeev Peshawaria

Author:Rajeev Peshawaria
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2018-04-04T04:00:00+00:00

The Ubiquitous 80:20 Rule

We’ve been referring to this rule throughout the book, and will continue to do so in the remaining chapters as well. Before I discuss how and why stretch goals should be applied, it might be time to take a detour and delve into 80:20 in a bit more detail. The 80:20 rule (also known as the Pareto Principle) is one of the most ubiquitous rules in nature, science, and business and should be the basis for how our management and organizational practices must evolve to have any chance of keeping up in the twenty-first century.

The Pareto Principle posits that 80 percent of output is a direct result of only 20 percent of input. It’s a principle as old as time, yet the theory as we know it was first developed by Italian economist Vilfredo Pareto in 1906, the result of his survey of land ownership in Italy. Pareto discovered that 80 percent of land was owned by only 20 percent of the population, a statistic he discovered was repeated throughout the Western world. Likewise, Pareto quickly realized the rule’s wider relevance when he noted that 80 percent of the peas in his garden came from only 20 percent of the pods, a discovery that is repeated time and again in our natural world. It’s interesting to note, also, that the 80:20 rule also applies within its own rule, for example in the Richter scale, which measures the impact of earthquakes on a 10-point scale. Each one point increase on the 10-point scale in fact represents a tenfold increase in impact, so the top 20 percent of the top 20 percent has almost unimaginable scale. In fact, once you start looking for the Pareto Principle, also called the “law of the vital few,” and the “principle of factor sparsity,” you see it everywhere. It has been recognized across the natural, social, and economic landscapes, in areas as diverse as criminology, drug abuse, earthquakes and volcanos, healthcare, and biology.

Obviously, the Pareto Principle has widespread relevance in business as well and is recognizable across sales, marketing, project management, software applications, and customer service. A few examples that might seem familiar: 80 percent of complaints come from 20 percent of customers; 80 percent of profits come from 20 percent of time allocated; 80 percent of sales come from 20 percent of clients; 80 percent of sales come from 20 percent of sales staff. Microsoft, in fact, discovered Pareto applied to both product features (Windows consumers used only 20 percent of features, 80 percent of the time) and software bugs. After discovering that 80 percent of system crashes were caused by 20 percent of the most complex bugs, the company was able to speed up product fixes by focusing on the most mission critical areas. Similar to the Richter scale, Microsoft also discovered that over 50 percent of system problems were caused by a mere 1 percent of bugs.

The Pareto Principle has been used before as a basis for performance management, most notably and notoriously under Jack Welch’s leadership at GE.

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