VIEWS: 19 PAGES: 2 POSTED ON: 2/26/2010
PQ March 2008 The 80/20 rule The Pareto principle or 80/20 rule states that 80% of the effects come from 20% of the causes. The rule originates from the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. This idea is on the syllabus of some accountancy exams too, so you may have come across this idea in your studies, since it can be applied to the analysis accountants do. One common exam question relates to customers and revenues, where the principle suggests that 80% of revenues come from the top 20% of customers. It could also be applied to suppliers: 20% of suppliers account for 80% of inventory. Or employees: 20% of employees give us 80% of our problems! Of course, the exact proportions are not always true, and indeed the “rule” sometimes simply doesn’t apply. For a large supermarket chain 80% of their revenues definitely does not come from 20% of their customers. However it can be a useful principle to consider, and where it does work, it can be a very useful analysis tool. When I was in the PwC Client Training Group it certainly did apply. On doing a customer analysis it was realised the majority of both revenues and profits came from the top 3 or 4 large clients. In fact when the profitability of the small clients were analysed, very little profit was actually made since each required so much additional administration. The group decided to switch their strategy to focus only on large clients and large jobs. You can also apply the Pareto principle to your life. It could be: 20% of what you spend your time on gives you 80% of the value you get. That’s a great thing to consider when prioritising items on to-do lists. A good question I heard recently, was the following: if there was one thing that you did over the next 2 weeks that would make a huge difference to your life, what would that thing be? Again, while not exactly 80/20, it’s a great question which applies the same basic principle that small things can generate large value. So what about the exam then, how does the 80/20 rule apply there? What are the small things (the 20%) that if you do them, and do then well, will make everything else (the 80%) fall into place? Here’s my view: Read the requirement very carefully. You might even call this the 1/99 rule, since you probably spend less than 1% of your time looking at the requirement, but if you interpret it wrongly you’ll get no marks. Spend time planning each question. A question plan gives you focus and direction and ensures the points you make are clear and will gain marks. Focus on the easy marks. Lets call this the 60/40 rule. Focus on the easy 60% of the marks – the easy calculations or the most obvious discussion points – and don’t waste time on the difficult 40% which can often take a lot more time and, given that you’ll probably score less well on these parts, won’t give you much additional benefit to your final mark. Learn and use proformas. For some papers such as tax and financial reporting, the right proforma, learnt and used properly, takes just a few minutes in the exam to put on the page but will make that question much easier and far more likely to be correct and complete. Another application we might have is the use of the 80/20 rule to your study time. Based on your experience in the past, what are the key things that you have done in your study time, that have made the most difference to you in the exam? Perhaps its doing practise exams, studying at a particular time of day, attending a specific course, using study cards, or even staying up all night the night before the exam! Write them down, and then plan how you will use those ideas to even greater effect this time around. Next consider the things that were a waste of your time – what were the bottom 20%, that really didn’t add any value to your study time at all? Perhaps there’s a time you don’t study well, or a course you attended that didn’t really help you. Just spend a minute considering what this was for you, and this time around do less of these things. The Pareto Principle can be a useful tool, so however you apply it, its always worth bearing in mind that its often the little things that give great results!
Pages to are hidden for
"The 8020 rule"Please download to view full document