The 80/20 Rule (also known as the “Pareto Principle”) is an incredibly useful tool for prioritization in problem-solving. Let’s pause for a brief second: it’s important to note up front that we are not exaggerating here. Yes, the steps to Pareto analysis are complicated. But we’ve walked you through a lot of decision-making and problem-solving tools before. We can confidently say that Pareto analysis is one of the most powerful tools boards can use to make strategic, well-informed decisions (second only to Directorpoint’s board management software, of course).
80% of the Benefit, 20% of the Work
Pareto analysis is used when multiple “causes” are contributing to a single “effect” (a problem). It may help to identify root causes before you begin you apply the 80/20 Rule. When presented with multiple courses of action in solving a problem, boards rarely have the time and resources to realistically consider pursuing every option. “80/20” refers to the idea that boards can produce 80% of the benefit from doing 20% of the work. In other words, prioritizing solutions which address the top 20% of causes contributing to a problem allow boards to mitigate 80% of the damage. Pareto analysis is, essentially, the application of the 80/20 Rule.
Determining the Count
Before we walk through the steps of Pareto Analysis, it’s important to know what we mean when we refer to the term “count”. The previously-mentioned “top 20% of causes” are determined by a count. This is a score which gauges, at a high level, the extent to which each cause is a problem. Most of the online guides to the 80/20 Rule leave the definition of the count vague. Many sources suggest that the count refers to the number of occurrences of each cause. The diagram in the walkthrough below is from the British project management website, Project Smart, we can see that the top cause is “Broken Links”. The “count”, in this case, likely refers to the number of broken links on a company’s website. The diagram on the right is from MindTools.com. In their guide, causes are given a “score” based on some common metric shared between the causes (e.g. how much each cause costs the company, the number of customer complaints regarding each cause, etc.).
Based on the inconsistency between the various authorities on Pareto Analysis, we recommend assigning values for a “count” (or “score”) based on the common metric of greatest concern to your board. Now that we’ve cleared that up, let’s walk through the steps!
How it Works
Before you begin a pareto analysis, the board needs to identify the root causes of a problem, assigning a score or “count” to each. If the board of directors is struggling to pinpoint the root causes, check out our article on fishbone diagrams for help.
The steps of the 80/20 Rule are as follows:
- Create a vertical bar chart. Labeling the x-axis “Causes” and the y-axis “Count”. Note: this refers to the “causes” of a problem and the “count” of their occurrence.
- At the top of the left-hand side of the y-axis, add a number rounding up from the top score assigned to a cause. Fill in the remaining space on the left y-axis in equal increments until you reach zero.
- Add “100%” to the top of the right-hand side of the y-axis, filling in the remaining space in increments of 10%.
- Draw and label the bars on the x-axis from left to right in order of their score/count (from highest to lowest).
- Plot a line across each cause on the x-axis, positioning each plot point according to their respective percentage of the cumulative score/count (and relative to the percentage increments on the right-hand side of the y-axis). Use the image above for reference.
- Draw a horizontal dotted line at the 80% mark of the y-axis, adding a vertical dotted line to the bottom of the graph where the 80% line and the plot line intersect.
Everything to the left of the vertical line represents the 20% of causes your board needs to solve to 80% of the problem. Boom. Mic drop. Exit stage left.
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