The Pareto Principle

General

Don’t let the title stop you from reading. Simply put, the Pareto Principle states that 80% of effects come from 20% of the causes. More simply put, 80% of your income comes from 20% of your cases/clients. By deduction, you should be spending 80% of your time on the 20% of cases/clients which will make you the most money. Take a minute to take stock of your best cases, the ones which will make you the most money. How much time do you spend on these cases? Even if you say you spend most of your time on these cases, do you spend 80% of your time on these cases? Probably not. No matter how hard I try to heed Pareto’s Principle, I admit that I do not.

Turning Pareto on it’s head

Let’s turn Pareto’s Principle around. The bottom 80% of your cases generate 20% of the income. How much time do you spend on cases which do not generate the most amount of fees for you or your firm? These cases which take up so much of your time do not generate the most income. Change your priorities. Spend the time on the clients and cases which will be most profitable.

A new application of Pareto

I admit that I cannot adhere to Pareto’s Principle and dedicate 80% of my time to the 20% of my most profitable cases. No matter how hard I try, I just can’t do it. But, here is something which has worked very well for me. First, you must rank your cases and clients into groups. I use “A” cases, “B” cases and “C” cases. Cases below a “C” I decline. Your “A” cases or clients are those which generate 80% of your income. If you can work up your “A” cases to increase the value by 10%, you will notice a huge increase in your revenue. Here’s an example. Suppose your “A” cases generate $100,000 for your firm with your “B” and “C” cases contributing $20,000. If you increase the value of your “A” cases by 10%, you increase your revenue by $10,000, whereas if you work harder on your “B” and “C” cases and increase the value by 10%, you make $2,000. When I saw the math and rationale behind this, it changed the way I work up my cases. It is based on Pareto, but in a much more manageable way for me and the firm.

But wait, there’s more

I have tried to show the more practical application of Pareto’s Principle and how I apply it to my practice. But, you can apply Pareto’ Principle to all aspects of business. Even Steven Covey’s Seven Habits of Highly Effective People acknowledges Pareto in number three: “Put First Things First.” Things that matter most must never be at the mercy of things that matter the least. Don’t spend your time on the wrong cases.

Here are a few other Pareto Rules which hold true:

80% of a company’s complaints come from 20% of its customers
80% of a company’s profits come from 20% of the time its staff spend
80% of a company’s sales come from 20% of its products
80% of a company’s sales are made by 20% of its sales staff

I saved this part until the end because if I lead with this, many would stop reading. The Pareto Principle was so named after an Italian economist who noticed that 80% of the land in Italy was owned by 20% of the population. What Pareto would think about today’s income distribution is a topic for another day. But, Pareto also noticed that 80% of his harvest came from 20% of his fields. Over a century later, the Pareto Principle is still relevant to your practice. Take a few minutes and review your cases/clients and sort them according to Pareto’s Principle. You’ll be glad you did!

Let me know if you found this article helpful or let me know another topic you may find interesting.