Most of us have heard the term “80/20 rule”. Some of us might have even heard of the root from where this comes from, i.e., the ‘Pareto Principle.’ The principle simply says that in most cases 80% of the effects are due to 20% of the causes. In other words, businesses often experience that ~80% of sales come from ~20% of the product portfolio, ~80% of the long-term value is derived from ~20% of their customers, ~20% of citizens make up for ~80% of tax revenue, etc. This principle has gained a lot of currency and has been applied very broadly in society but has its origins thanks to the work of Vilfredo Pareto.
He was an Italian civil engineer and economist and first discovered this principle in his research (in 1896) of land ownership in Italy where he observed that 80% of the land was owned by 20% of the population. He was also the first to discover that income follows a Pareto distribution which has since been observed and referred to as the “Champagne Glass Effect.” He later tested the principle’s empirical efficacy while studying economic efficiency and income distribution. Vilfredo Pareto is also credited with introducing the fundamentals of what eventually helped develop the field of microeconomics.
Since the Pareto Principle was first theorized, there have been a set of additional concepts that have been developed that are closely related to it and these are the ones I want to discuss today. They are loosely referred to as:
Pareto Efficient: This is a situation where implementing a change to make one set of criteria better off does not come without making another criterion worse off. In other words – the status quo is optimal, and any “improvement” introduced, holistically speaking, will leave some other criteria worse off.
Pareto Dominant: This is when a change is introduced to improve one criterion and no other criteria is worse off.
Pareto Improved: Finally, this is when a change is introduced to improve one criterion and at least one other criterion is better off, and no other criteria is worse off.
In my observation over the past 25 years, I have noticed that most analytic enhancements inside organizations tend have outcomes that are primarily “Pareto Efficient”. In other words, implementing a change to make one set of criteria better off does not come without making another criterion worse off. Organizations have a genuine need to make improvements in their analytic capabilities - the ‘Big Data’ revolution has made this an inevitable choice. The question is not whether improvements need to be made or not; The answer is an obvious ‘Yes’. The debate ought to be around evaluating if these investments have an expectation of being ‘Pareto Dominant’ at minimum and/or ‘Pareto Improved’ at maximum. My humble opinion is that if this is not discernible then don’t make the investments! The organization will be the worse off for it.
There is a lot of talk and often we are seduced by terms like “move fast and break things” thanks to Silicon Valley startup narratives. If you dig under the eye-catching phrase, you will notice that there is no such thing as “move fast break things”. What you will find is that there is a lot of self-disruption and these two are not the same thing. My very strong POV is that if you “move fast and break things” in the analytics capabilities space the “putting it back together” story will be a very expensive and arduous one. I have had the opportunity to benchmark with organizations that have taken the “move fast….” route and have since returned to the more “traditional” route of capability development based on the time-tested approach of building on strengths. They have learned to not just introduce enhancements without understanding the full picture of what other things these “improvements” could potentially break.
I have deduced that this tendency, to implement changes to make one set of analytics capabilities better without understanding what other criterion could be worse off, primarily due to organizational complexity and turf politics. It is never because organizations do not want to do the right thing but it is always because there is no credible “wholistic” view of what exists, what are the gaps and what needs to be improved. If organizations had an objective view of the ecosystem, then their investments would be either ‘Pareto Dominant’ (i.e., when changes are introduced to improve one criterion and no other criteria is worse off) or better yet they would be ‘Pareto Improved’ (i.e., when changes are introduced to improve one criterion not only is that criteria better but at least one other criterion is better off and more importantly no other criteria is worse off!)
We, all of us, who are leaders and practitioners in this space have the obligation, on behalf of our organizations and teams, to require that our investments are making the “whole” better; not just one or a few parts. This would be the equivalent of running a 100 miles per hour except you are doing that on a tread mill!
Don’t do that!
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