Pareto analysis is a categorical approach to decision-making that helps in identifying changes that will be most effective in a business. In other words, Pareto analysis helps in establishing those changes that will be most beneficial where many possible courses of action can be taken. The Pareto principle, otherwise known as the 80/20 Rule holds that 80% of achievements realised originate from 20% of the effort. The principle can aid an organisation in avoiding over-analysis in the decision-making process. This is mainly because the organisation can adopt the Pareto principle to allocate resources where the impact will be most powerfully felt.
How Pareto Analysis Is Used
In order to use Pareto analysis for decision-making, a list of problems or options should first be identified along with their causes or benefits.
Secondly, the problems or options should be grouped together especially when they are part of a similar larger problem, for example, the root cause of five problems may be the same.
The third step involves the assignment of a suitable score to each group. For example, if you are trying to evaluate software satisfaction or effectiveness in an organization, you can score each software based on the number of complaints received on each.
Lastly, identify the group with the highest score and take action.
Pareto analysis can for instance, be used as a risk management tool hence, helping in the decision-making process. For example, risk managers may use Pareto analysis as their selected tool for making informed decisions depending on the results of risk analysis. Furthermore, the analysis puts into consideration alternative actions for risk management. These alternatives are deliberated in relation to the expected benefits that will be realised based on alternative actions. Uncertainties too may be put into consideration depending on the expected benefits.
For a project manager, the value of Pareto analysis lies in the fact that it is a constant reminder to remain focused on the key 20% (factors) that are crucial to the organisation. The organisation will as a result accomplish 80% of the results emanating from 20% input. Project managers are therefore able to concentrate their energies and resources on the things that matter the most.
Pareto principle demonstrates the lack of symmetry that is guaranteed to appear between the amount of work put in and the accomplished results.
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