I remember a boss who ,early in my career, said “stick by the 80/20 rule and you will go far” This did help me focus on the most important things to do first, but back then life was easier. You could build standard systems with standard transactions and customers were forced into working with the systems delivered; best practice or not. Well we already know that a best practice for a company may not fit the customer’s view of a best practice.
We are living in different times where the customer is king and wants processes and systems to wrap around what they want to do. This means we are living in a world of exceptions that are bounded by certain constraints. This means that there is a core behavior of a process with lots of local/individual variations. Certainly the user customer experience with our processes is demanding new interactions that do not follow the 80/20 rule. This effect is permeating more aspects of process behavior and demanding more process agility.
The same goes for decisions. It used to be that decisions could be made in a vacuum for the “normal situations”. This is no longer a luxury we can afford. Just look at the financial and real estate meltdowns for example. People made decisions that optimized on a single view (usually greed driven, but not always). Little concern, even when pure motives were involved, was given to the larger and interconnected effects. We were ambushed by outlier conditions that nobody thought were possible. The dangers were in the 20% and decision makers could not imagined the interactions that lead to the mess. These effects could have been simulated along with thousands of other potential interactions and outcomes. I believe that new leadership models need to exercise disciplines that leverage new forms of decision making that take advantage of analytics and predictions using near real time events, processes, value chains and market interactions.
Bottom Line:
My take way is to use the 80/20 rule to get started, but finish with simulating the integrated alternatives. This may kick off a whole new wave in predicting the effects of complex events. For sure, predictive optimization/simulation will look better than tasting the bad results of the normally benign 20%
4 responses so far ↓
1 Jon Garfunkel // Jan 14, 2009 at 7:31 pm
Jim,
Around my office, you’re held in high regard. But this sentence has my head spinning; there is probably a word missing:
“I believe that new leadership models need to exercise that leverage new forms of decision making that leverage analytics and predictions using near real time events inline with process, value chain and market interactions.”
As per the 80/20 rule (Pareto Principle), I find it always helpful to provide an example for the given domain: e.g., 20% of the use cases are invoked by 80% of the users. And indeed, which 20% may be different for different customers!
When you mention “outlier conditions that nobody thought were possible” I think you’re getting at a separate point, akin to what Nassim Nicholas Taleb has been calling the black swan theory (highly improbable events with massive impact). I’ve only read a number of reviews on the book, but I believe that he’s faithful to Pareto, while disdainful of many contemporary economists. Remember also that risk analysts aren’t looking at the “20%” events, but those with with probability of 1 out of 10^n.
And back to your top point. When you refer to the “80/20 Rule”, are you referring to (a) the mathematical model of the Pareto principle, or (b) the popular application of it? (compare with: email still “works” in the sense that it still goes from sender to recipient, but doesn’t work very well when *applied to* managing business processes.)
Jon
2 Jim Sinur // Jan 14, 2009 at 8:30 pm
Jon,
Good catch on the sentence. Thanks. I did miss a word. I was a victim of my dersire to multi-task and lost a word. .
The 80/20 rule that I was reffering to is as follows:
Focus on the 80% that is the normal and worry about the excpetions later as they evolve (the remaing 20%). This principle has been succesful in dealing with case management, process flow and decisions in the past and worked well. .
My point is that the danger is in the 20%. It might be exceptional customer needs, exceptional logic and in the extreme case of low probability conditions that catch decision makers unprepared.
3 Jon Garfunkel // Jan 14, 2009 at 9:25 pm
Jim,
That said, wouldn’t you agree that the Pareto principle still holds?
Process Manager: Why are you spending all your time on eingeering for the exception case?
Process Engineer: Not all– only 80%. The exception cases may happen 20% of the time, but they cause 80% of our support costs.
If the manager figures to not worry about the 20% exceptions because they’re only 20% of the cost, he’s assuming uniform distribution, and not understanding the 80/20 rule at all.
Pareto holds.
Jon
4 Jim Sinur // Jan 14, 2009 at 11:53 pm
I would say that it makes more sense for processes than it does for strategic decisions. Maybe there are some exceptions that would cause customers to walk and those should be dealt with early. The design should be thought through to handle the majority, but be flexible to adapt to exceptions. It may mean examining some of that 20% depending on the process and the risk factors
In decisions, I would say that it’s worth the extra time to simulate through all the exceptions especially when they could threaten your ability to thrive.
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