Heuristics or rules of thumb are of great benefit in formulating approximations and quick decisions. They can just as easily lead one astray through over simplification. In thinking about heuristics as they apply to organizations, I have been pondering three: the 80/20 Rule, the 90 Rule, and the 99 Rule.
The 80/20 Rule or Pareto Principle
The Pareto Principle is a heuristic that estimates cause and effect, it is defined as:
Also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity; states that, for many events, roughly 80% of the effects come from 20% of the causes. Named after Italian economist Vilfredo Pareto (adapted from wikipedia).
While the Pareto Principle has reasonably good statistic evidence of its validity in estimating cause and effect, it does not do so well in predicting effort. In other words, 20% of your future actions will yield 80% of the future value. Which of the four out of five things will you do that will have no or limited impact on the 80%?
The 90 Rule
This rule is based on the observation of contributions to social media sites.
In Internet culture, the 1% rule is a rule of thumb pertaining to participation in an internet community, stating that only 1% of the users of a website actively create new content, while the other 99% of the participants only lurk (adapted from Wikipedia).
It may seem strange to invoke an internet rule but compare this to an organizational structure. What is the relative proportion of shop floor workers to middle to senior managers? Typically there is about a 1:10 ratio of doers versus managers.
Consider an organization of 1,000 people; a reasonable sized government ministry or medium-sized enterprise. Within such an organization, there would be about 10 senior leaders (Assistant/Deputy Ministers, CEOs, Vice Presidents), 90 middle level managers (Directors, Managers, Assistant Managers) and 900 shop floor staff and immediate supervisors (clerks, sales people, workers, supervisors, etc.).
In other words the 90 rule is a reasonable heuristic to predict the allocation of resources and effort. 1% or the allocated resources will have a disproportionate effect on the next 9% which in turns controls or influences the final 90% of an organization.
The 99/0.9/0.1 Rule
A more lean view of the 90 rule is that 99 rule. The 90 rule is accurate in the allocation of operational resources but I believe underestimates the effect of more strategic or exceptional events. The CEO’s decision to close an unprofitable factory is not made by 10 people in the above fictional organization, but instead by 1 person. Certainly the other 9 people support and (hopefully) validate the decision but the impact is then disproportionate to the remaining 990 individuals in an organization.
The 99 rule is a better tool to estimate strategic decisions within an organization.
Recap of the Rules
- Pareto: 20% of an organization’s actions account for 80% of its results.
- 90 Rule: 1% of the operational decisions are enacted by 9% of the organization affecting the remaining 90%.
- 99 Rule: 0.1% of the strategic decisions are enacted by 0.9% of the organization which impacts the remaining 99%.
What are your thoughts? Are the above heuristics reasonable and valuable tool when allocating organizational resources? Is there too much variability and the rules are a meaningless average? Do you have any anecdotal experience with any of the above rules in either their cause or effect?