What is the Pareto Principle and why is it important ?

What can be the reasons behind the issues plaguing a certain workplace? Well if we go by the works of the Italian sociologist and economist Vilfredo Federico Damaso Pareto, it is only 20 per cent of causes. It is now called the Pareto Principle or the 80/20 rule; it is now considered an important theory on how there is always an imbalance in the inputs and outputs in any circumstances.

The reason why it is so important even today is because it tells us that in every task in any situation, there are certain parameters that generate a bigger outcome. This means that some tasks should be prioritized over others to ensure that efficiency increases.

The Pareto Principle

In 1906, Vilfredo Pareto conducted a study that returned a startling conclusion: 80 per cent of the entire land of Italy was owned by 20 per cent of the people. This is the reason why it is also called the 80/20 rule. Pareto also conducted this research on other countries and found roughly the same conclusion. While some times, the conclusions were 70/30 or oven 90/10 the average  usually turned out to be 80/20.

This principle can also be applied to other areas such as IT, manufacturing, human resources. This means that 20 per cent of a company’s employee pool is responsible for 80 per cent of the company’s revenues. Thus it is in an organization’s interest to dignity those 20 per cent and ensure they are retained.

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Advantages of using the Pareto principle 

Improves efficiency 

Using the 80/20 rule, a company can easily improve the efficiency of the workplace. For example, if a company identifies the top 20 per cent contributors they can easily make them do tasks that are complex and have to be done on a tight deadline. This also means that the allocation of tasks will be streamlined. It will also allow the company to have time to train the other 80 per cent to increase their efficiency which in turn will further improve the prospects of the entire company.

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Increases revenue and profits 

The greatest motivation why companies deploy the 80/20 rule is because it increases their revenues and profits. In addition, tasks identified using the rule can also yield higher revenues and profits with a small pool of employees and that too within a quick time. Companies can also provide more incentives to the top 20 per cent of employees that will further motivate them to perform better.

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Better Time Management 

Another advantage of using the Pareto principle is that it allows the company to better plan the projects and ensure each one of them is completed on time. For example, if a company knows which of their employees are diligent they can plan their tasks according to it. So for example, if a company has a client that requires big projects that will ensure a big paycheck they can easily allocate their best people on the job. While the other team members can take over the job where ample time is available before the deadline.

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Better policy making 

One of the best ways a company can ensure that they grow year after year is to ensure their policies encourage talented people. A great way to do this is to ensure that a company’s policy is following the Pareto principle. For example, a company can identify areas where they can make the most revenue by completing the task in quick time. Thus employees from the top 20 per cent can be dedicated full time to such tasks prioritizing them over the other tasks that might not yield significant revenue generation for the organization.

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Easier to solve problems 

Remember the original logic behind the Pareto principle: 80 per cent of the problems are caused by the 20 per cent of the causes. So, in a corporate setting, companies can massively decrease the number of issues plaguing the workplace. All they have to do is to identify the 20 per cent of the issues that are causing the most problems that will immediately increase the efficiency of the workplace.

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Disadvantages of using the Pareto principle 

Misidentification of the 20 per cent 

While there are considerable advantages of the 80/20 rule, they all depend on one important condition: correctly identifying the 20 per cent who are doing the most work. And while this principle can bring great dividends to a company if done correctly, a case of misidentification causes the opposite effect. 

For example, imagine an employee who is great at their work but is incorrectly identified as an inefficient employee. For them it will become a great hurdle to their career as they will be given the tasks that generate lower revenue for the company.

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Discriminatory to the other 80 per cent 

While the Pareto principle gives us the reason that the top 20 per cent do the 80 per cent work. However, it doesn’t explain why the other 80 per cent are not as effective. There could be genuine reasons where a talented employee is not able to get into the top 20 per cent. This could range from lack of training to not being encouraged enough and recognized by the senior management. The 80/20 rule thus discourages companies from helping the employees in the 80 per cent from improving themselves.

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Discourages innovation 

A great disadvantage of using the Pareto principle is that it makes companies rely on the same 20 per cent for most of their revenues. This means that companies now rely on a limited pool of people to generate most of their revenue. This lack of diversification in revenue generation poses a great threat to the company.

So in future if those 20 per cent were to leave the company would be in great peril. Also since the company is heavily reliant on those specific people they tend to get overworked which can lead to decrease in efficiency and discourages innovation.

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Is Pareto principle a must in the workplace 

Now that we have discussed the Pareto principle and its merits and demerits we come to the big question. Is it effective to use it in the workplace? The answer is both yes and no depending on the projects and the situations.

So, what are the conditions where using the 80/20 rule is good:

• If a project is generating enough revenue and has to be finished within a stipulated deadline.
• If there is a lack of resources and manpower for a project where the company needs to employ as few people as possible.
• For sales and new customer acquisition which has a very high chance of increasing revenues and profits and revenues.

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Now here are the conditions where the Pareto principle should never be used:

• In projects where every team member is specialized in a particular task 
• Projects where teams need creative ideas which are very hard to quantify.
• Projects where quality is paramount and there is lack of time.

While the Pareto principle says that there are top 20 per cent employees who do the majority of the work, it is still hard for companies to find more such employees. This is where our Artificial Intelligence backed tool BarRaiser can help companies take their hiring to the next level.

BarRaiser is the best AI interview platform that features structured interviews, AI-generated interview notes, interviewer training, and tools to ensure quality hiring while eliminating biases from the recruitment process. With BarRaiser’s support, you’ll be well-equipped to build a strong team of sales associates who will drive sales and deliver exceptional customer service.

Using our tool, an interviewer can create a robust interview plan. Each interview plan is unique but for the sake of avoiding bias every candidate is tested on the same plan so that each one gets a fair chance. We also provide interviewer training for companies to get their recruiters trained. Companies can also opt for our interview as a service where we will take over the recruitment process. BarRaiser has a pool of over 1500 trained interviewers.

We also believe in the motto of checks and balances, which is why our tool analyzes the interviewer to ensure they are conducting the interview professionally. Reports are gendered on both the interviewer and the interviewee to eliminate hiring bias.