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Pareto Analysis Step by Step
Pareto Analysis is a statistical technique in decision making that is used for the selection of a limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also know as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the benefit of doing the whole job. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%). This is also known as the vital few and the trivial many.
In the late 1940s quality management guru Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. Pareto later carried out surveys on a number of other countries and found to his surprise that a similar distribution applied.
The 80/20 rule can be applied to almost anything:
- 80% of customer complaints arise from 20% of your products or services.
- 80% of delays in schedule arise from 20% of the possible causes of the delays.
- 20% of your products or services account for 80% of your profit.
- 20% of your sales-force produces 80% of your company revenues.
- 20% of a systems defects cause 80% of its problems.
The Pareto Principle has many applications in quality control. It is the basis for the Pareto diagram, one of the key tools used in total quality control and Six Sigma.
In PMBOK Pareto ordering is used to guide corrective action and to help the project team take action to fix the problems that are causing the greatest number of defects first.
Seven steps to identifying the important causes using Pareto Analysis: ¹
- Form a table listing the causes and their frequency as a percentage.
- Arrange the rows in the decreasing order of importance of the causes, i.e. the most important cause first.
- Add a cumulative percentage column to the table.
- Plot with causes on x-axis and cumulative percentage on y-axis.
- Join the above points to form a curve.
- Plot (on the same graph) a bar graph with causes on x-axis and percent frequency on y-axis.
- Draw a line at 80% on y-axis parallel to x-axis. Then drop the line at the point of intersection with the curve on x-axis. This point on the x-axis separates the important causes on the left and less important causes on the right.
This is a simple example of a Pareto diagram using sample data showing the relative frequency of causes for errors on websites. It enables you to see what 20% of cases are causing 80% of the problems and where efforts should be focussed to achieve the greatest improvement.
The value of the Pareto Principle for a project manager is that it reminds you to focus on the 20% of things that matter. Of the things you do during your project, only 20% are really important. Those 20% produce 80% of your results. Identify and focus on those things first, but don't totally ignore the remaining 80% of causes.
¹ Wikipedia, Pareto Analysis
Pareto analysis is named after Vilfredo Pareto, an Italian economist who lived in the late 19th and early 20th centuries. In 1897, he presented a formula that showed that income was distributed unevenly, with about 80% of the wealth in the hands of about 20% of the people.
Six Rules for Great IT Project Success
Project delivery makes IT organisations credible. When IT "gets it right" at the project level, its ability to impact the financial results of a company increases and its leadership in providing strategic direction improves. Good project delivery is the key to unlocking the door from the back-office to the boardroom. And yet, according to a recent survey by Accenture, only 29% of IT projects are considered successful.
The Non-Pareto Principle
The "Pareto principle" has by this time become deeply rooted in our industrial literature. It is a shorthand name for the phenomenon that in any population which contributes to a common effect, a relative few of the contributors account for the bulk of the effect. Years ago I gave the name "Pareto" to this principle of the "vital few and trivial many." On subsequent challenge, I was forced to confess that I had mistakenly applied the wrong name to the principle. This confession changed nothing - the name "Pareto principle" has continued in force, and seems destined to become a permanent label for the phenomenon.
21 Project Management Success Tips
Managing software projects is difficult under the best circumstances. The project manager must balance competing stakeholder interests against the constraints of limited resources and time, ever-changing technologies, and unachievable demands from unreasonable people. Project management is people management, technology management, business management, risk management, and expectation management. It's a juggling act, with too many balls in the air at once.
Common Cost Management Mistakes
- Not understanding what is involved to complete an item of work.
- Starting with an amount of money and making the project cost fit it.
- Assigning resources at more than 80% utilisation.
- Failing to build in contingency.
- Providing estimates under pressure in project meetings.
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