Decision Making

by Ian Moore

Pareto analysis

Men stumble over the truth from time to time, but most pick themselves up and hurry off as if nothing had happened.

Winston Churchill

This technique uses a variation of the Pareto principle, in other words, ‘80 per cent of the advantage comes from 20 per cent of the work’. In many situations, changing 20 per cent of the situation can resolve 80 per cent of the problems. If we can identify a small number of changes we can make which will make a large difference, we can then have a large impact with a small amount of effort.

This approach is particularly useful in innovation scenarios, where a quick short-term gain can produce an easy and early win and create buy-in to the innovation process.

Using the technique

  • Create a list of the factors that may be responsible for causing your desired outcome.
  • When you are reasonably sure that you have listed most of the significant factors, create a second column with an approximate percentage estimate of each factor’s contribution to the outcome.
  • Starting with the largest percentage and working downwards from a percentage point of view, create a running total of the percentages. When you have reached about 80 per cent, stop. You have now identified the most significant factors.
Caution

This technique does not always work. If you find that you have many factors, all with relatively small significance percentages, then most of the factors will need to be included to get to the 80 per cent mark. In this case, the Pareto analysis may be of little use to you. This analysis is at its most useful in cases where you have only a relatively small number of factors (about 20 per cent) needed to make up the 80 per cent significance.

You should also be aware that some factors grow in significance over time: they can start of with a small percentage, but this gets larger as time moves on.

Tip

If you enter the factors and percentages in a spreadsheet, it is very easy to create a simple percentages column and then have another column for cumulative percentages.

Making your decision

Once you have established the 20 per cent (or so) of the factors that have the most (80 per cent) significance, you can them implement decisions/actions involving those factors, while ignoring the others. This will hopefully give you the vast majority of the advantage of the decision with a small amount of effort.

You can, of course, run the analysis again after a period of time has elapsed. The Pareto principle should still apply. Of the original factors which are left, you should find that 20 per cent of these are responsible for 80 per cent of the remaining issues. Of course, because you have already implemented the first 20 per cent, which formed the easiest parts of the decision, running the next analysis will not produce as big a difference and will take more work. Even so, this is a good approach to use for the rolling implementation of a decision.