Pareto analysis: Boost efficiency with the 80/20 rule

Prioritization is one of the trickiest skills for a project manager to master. You want every initiative your team works on to yield significant impact, but tasks often compete for resources, forcing you to determine which will deliver the most value.

The Pareto analysis is a simple statistical technique that allows project teams to rank work according to its cumulative impact. The methodology is especially useful within the Six Sigma quality control framework.

Here’s everything you need to know about Pareto analysis so you can add it to your task prioritization toolbox.

What is the Pareto analysis?

According to the Project Management Institute, the definition of Pareto analysis is:

“A technique used to identify the few factors that have the greatest impact on an outcome, result, or on measures of quality, satisfaction or performance.”

In other words, by recognizing the relative benefit of different activities, project managers can analyze tasks’ statistical impact and prioritize them according to the greatest overall effect.

To communicate the prioritization process, project managers often draft a Pareto distribution chart illustrating each tracked variable’s occurrence and distribution. This visualization helps stakeholders see and understand a task’s comparative importance.

The 80/20 rule

In the 1940s, engineer and management consultant Joseph M. Juran developed a prioritization methodology based on the work of Italian economist Vilfredo Pareto. Pareto observed that 80% of Italy’s land belonged to 20% of its population. He argued that the distribution held true across cultures, dubbing it the Pareto principle.

Juran extended the Pareto principle to business contexts and applications, noting that 20% of project work achieves 80% of benefits. Conversely, Juran states that 80% of defaults also trace back to 20% of causes. Eventually, management experts began calling it the 80/20 rule.

Other scenarios where Pareto analysis applies include:

• Communicating defect or error rates to stakeholders

• Prioritizing bugs or tasks according to the severity of their impact on a system or business

• Analyzing quality management data

Pareto benefits

For project managers, the Pareto principle is a reminder to focus on the 20% of tasks that matter most. As a result, it delivers the following benefits:

• Organizational efficiency: Pareto analysis helps teams identify the root cause of issues so they can focus on solving problems that deliver the greatest return on investment (ROI). Teams that prioritize impactful tasks improve overall efficiency and productivity.

• Problem-solving: The analysis provides a clear roadmap outlining how and when to address project tasks and challenges based on cause and effect.

• Decision-making: The Pareto analysis technique benchmarks practices, helping the team track operational effectiveness and determine which areas or workflows require improvement.

• Time and change management: With Pareto analysis, leaders can identify which policy changes will lead to significant improvements and how long they should spend implementing them.

• Planning and troubleshooting: As part of a business continuity plan or risk register, a Pareto analysis can help teams identify the best course of action during a crisis to quickly get the organization or project back on its feet.

• Communication:

  A Pareto chart illustrates the cumulative effect of issues on a system or organization, helping stakeholders evaluate and understand leadership’s problem-solving approach.

How to conduct a Pareto analysis: 6 steps

These are the steps necessary for conducting a successful Pareto analysis:

1. List problems

Work with team members, clients, and other stakeholders to draft a list of issues to resolve, referencing customer feedback, formal complaints, or help desk logs.

2. Identify the cause

Leverage the following identification techniques to identify the cause of issues the team wishes to address:

• Five whys

• Failure mode and effects analysis (FMEA)

• Fault tree analysis

• Scatter plot diagram

3. Rank issues according to standardized scores

After categorizing issues according to their root cause, create a standardized scoring model to rank each one according to importance. For example, if the team wishes to maximize profits, it can rank issues according to ROI. If the goal is to increase customer satisfaction, score issues according to the frequency of client complaints received per month.

4. Group issues according to common causes

Organize issues according to their root cause. So, if an e-commerce website’s checkout process prompts three types of client complaints, you would organize them into a single category.

5. Total scores for each group

Once the team organizes each issue by cause, total the scores to determine the frequency for each root cause.

6. Graph scores

Use the following steps to produce a Pareto chart example that quantifies your team’s issues:

1. Create a vertical bar chart listing causes on the X-axis and score on the Y-axis.

2. Arrange the bar chart in descending order, placing the root cause with the highest score on the left. Track the cumulative score of each cause in this order. To find each cause’s cumulative score, add its score to the running total from left to right.

3. Calculate the cumulative frequency percentage of each root cause by dividing its cumulative score by the total and multiplying the result by 100.

Cumulative frequency percentage = (Cumulative score / Total score) x 100

1. On the right side of the bar graph, create a second Y-axis with increasing percentages, starting with 0% at the origin and growing incrementally to 100%.

2. Plot each cause’s cumulative frequency percentage using the X-axis and the new Y-axis.

3. Form a line graph by joining the percentage points together into a curve.

4. Draw a horizontal line at the 80% point on the second Y-axis until it intersects the percentage curve. Any cause to the right of this is one of the vital few. The causes on the right are known as trivial issues.

Pareto analysis example

Imagine you run a digital storefront. You decide to conduct user experience surveys and consult with stakeholders and customer service reps to determine the severity, impact, and root causes of the most common issues. Based on those consultations, you draft a list of problems and their sources and score them according to complaint frequency.

Grouping the problems according to cause and adding up the scores for each, you rank the website’s customer service issues according to the problems with the highest cumulative frequency.

1. Lack of automation (items 1, 2, and 3): 31 complaints

2. Poor SEO (items 4 and 5): 22 complaints

3. Tracking data (item 6): 8

When combined, issues caused by the lack of automation and poor SEO make up over 80% of the total complaints. If you want to significantly improve the quality of customer service, your team should address those root causes first.

The best tool to support Pareto analysis

Pareto analysis and charts identify and communicate priorities, but they become even more effective when used in concert with Tempo’s Strategic Roadmaps. This application provides additional visibility to your improvement plans and priorities by tracking task completion and identifying potential roadblocks. You can even use a change template to outline how improvements will unfold.