Pareto Principle: Don’t Sweat the Small Stuff

The Pareto Principle (80-20 Rule; Law of the Vital Few) is a valuable quality management tool because its application encourages a focus on the most crucial issues.

For many events, roughly 80% of the effects come from 20% of the causes.

—Vilfredo Pareto (1848–1923)

The Pareto Principle (also known as the 80/20 Rule or the Law of the Vital Few)

Vilfredo Pareto
Vilfredo Pareto (1848–1923) was an Italian economist.

More than a century ago, an Italian economist by the name of Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of the population.

Subsequently, others observed a similar phenomenon in other situations, e.g. 80% of sales come from 20% of customers, 80% of the rise (or fall) in the value a stock portfolio comes from 20% of the stocks, 80% of complaints come from 20% of problems, 80% of results are contributed by 20% of the workers, etc. See the graphs below.

Graphs showing 20% of inputs contributing to 80% of outputs, 20% of effort contributing to 80% of results, and 20% of causes contributing to 80% of consequences.
The Pareto Principle.

The Pareto Principle, or 80/20 Rule, is merely an approximation and applies to typical distributions. It could easily be 70/20 (e.g. 70% of complaints due to 20% of problems) or 90/10 (90% of work performed by 10% of staff). The numbers don’t necessarily need to add up to 100.

The principle is based on the fact that the distribution of most things is unequal. For instance, each worker in a company does not contribute exactly the same amount to the results, adverse events that occur in hospitals have different levels of impact on reputation, customer satisfaction, finance, etc.

Applying the Pareto Principle in Healthcare Quality Improvement

An interesting observation but how is it useful? A well-known business tool, the Pareto Principle can help you channel your resources to the most important items (the vital few) and give you the best bang for buck. For example, if long waits and billing issues in an Emergency Room (ER) are causing 70% of complaints by ER patients, then these two problems should be given priority (over a host of other issues) when selecting quality improvement initiatives.

Some hospitals make the mistake of trying to tackle every problem simultaneously because they all seem important. And they might be; in an ideal world you would address all the problems. However, realistically, you are more likely to have limited resources (staff, money, time), in which case paying attention to the items that matter the most would be a more effective management strategy.

Law of Diminishing Returns

Related to the 80/20 Rule, the “Law of Diminishing Returns” states that, in a production system, there will be a certain point at which additional units of input (workers, time, effort, materials) will yield increasingly negligible outputs (comparatively less improvement in the final result). This makes sense. For instance, if an ER is achieving, say, 95% reliability in providing all the recommended care components for community-acquired pneumonia, it would not be prudent to invest in more resources to improve the rate to, say, 97%.

A different situation might be another ER that is achieving only 50% reliability. The same amount of resources required to lift the performance of the first ER from 95% to 97% could easily improve the second ER’s from 50% to 85%.

We also suggested using the Pareto Principle and the Law of Diminishing Returns as a smart strategy to prepare for the CPHQ examination.