Malcolm Payton: using the Pareto Principle to deliver efficiency

Malcolm Payton, Naace board member on using the Pareto Principle to deliver efficiency

You may not have heard of the name, but you will have heard of the principle. The Pareto Principle, developed by Vilfredo Pareto in 1911, is often know as the 80/20 rule and is used in a variety of contexts. Malcolm Payton, Naace board member, applies the principle to making processes and budgets more efficient

As a simple example, let’s start with a sales company that sells widgets at £10 each. If they have one hundred regular customers the 80/20 principle tells you that twenty of their customers will bring in sales of £800 while the remaining eighty customers will bring them sales of just £200.

This idea is, of course, of considerable interest to sales teams; if they can identify the twenty people who bring in 80% of their sales they know these are key customers who should command a lot of attention. If they can just find another ten exactly like these key customers they can happily ignore the remaining eighty customers – they will increase income and have much less work. Easy!

The Pareto Principle tells us that managing 80% of our budgets will take up just 20% of our time and managing the remaining 20% of the budget will take up 80% of our time

Since it was first articulated, the Pareto Principle has been applied in many contexts. To take budget management as an example, the Pareto Principle tells us that managing 80% of our budgets will take up just 20% of our time and managing the remaining 20% of the budget will take up 80% of our time. This may, at first, seem like a bit of useless trivia but it can enable you to manage budgets more efficiently as you can identify those that need more attention and can avoid spending too much time on the ‘tame’ budgets.

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Financial managers often have to report to others with less confidence in manipulating figures. In these circumstances it’s up to the business team to present figures in a way that allows effective and efficient decision-making. One very good way of doing this is to create one spreadsheet for the ‘tame’ budgets (the 80% that need less attention) and manage these through standard alerts and exception reporting. You can then create a separate spreadsheet for budgets that need to be managed more actively. This facility is rarely seen on full accounting packages but most have some sort of flag you can use to help separate budget lines in this way, and so is easy to automate.

It can allow you to manage budgets more efficiently as you can identify budgets that need more attention

Of course, you can also apply the Pareto Principle to how much time you spend supporting students – 80% of your students can be managed in 20% of the time and 20% of students will take up 80% of the time. A word of caution here, however – pupils are not like customers who can be discarded and replaced by better, more profitable alternatives. If oranges become too expensive, people can buy apples but, if all fruit becomes too expensive, then health suffers.

Education is a universal service. Our mantra should not be, ‘Let’s make it more efficient by focusing on our most profitable customers’ but rather, ‘There was a shepherd who had a hundred sheep who, when he realised one was lost, left the 99 and went to look for the one that was lost.”

The Pareto Principle tells us how to make processes more efficient; it does not tell us how to make children more valued and more likely to grow into useful members of society.