Way back at the start of the 20th century, a prominent Italian engineer and philosopher by the name of Vilfredo Pareto noticed that 80% of the land in his native country was owned by 20% of the population.
Intrigued by the fact that such a large chunk of wealth was created by so few, he went onto test the boundaries of this dynamic, even observing that 20% of the pea pods in his garden contained 80% of the peas.
Some 40 years later, an American management consultant called Joseph Juran stumbled across Pareto’s work and explored it further. Noting that for many events approximately 80% of the effects come from 20% of the causes, Juran coined this occurrence the ‘Pareto Principle’.
Today, the formula is better known as the ‘80/20 rule’ and has come to feature in every half-decent business management textbook going. The belief that for many areas of business — especially revenue generation — 80% of the reward comes from 20% of customers continues to be seen as a barometer of healthy practice today.
The relevance of Pareto’s Principle popped into my mind this month following conversations with distributors about some of the recent consolidation taking place in the catering equipment market.
Myriad factors contribute to insolvency, but one observation frequently made is that companies which get into trouble are often guilty of spreading themselves too thinly.
Either they try to cover too broad a geographic area, over-promise on what they can actually offer or massively under-sell themselves just to secure work.
If the Pareto Principle also suggests that managers can maximise output by focusing on the 20% of customers that deliver 80% of the business, then defunct distributors which fell into any of the traps above were probably some way short of Pareto’s magic ratio.
In theory, it’s likely that their top 20% of clients would have accounted for just 40% or 50% of sales.
At the other extreme, you’ve got cases such as TT Catering — which sadly ceased trading last month — whose business was heavily concentrated into the hands of just a few very large customers.
Having consistently grown its business over 11 years, it seems a little crass to simply turn around and say TT had too many eggs in one basket, but the company itself will admit that it always ran the risk of trouble if circumstances suddenly changed with the two or three clients that represented the majority of its sales.
The 80/20 rule is by no means a guarantee of corporate success, nor does it apply to every organisation, but it would be interesting to know just how many catering equipment companies still refer to it as a useful indicator of stability.
Everybody, after all, wants to strike the perfect balance between time, effort and reward.