Pareto Chart Explained: PMP Uses & Real-World Examples

I can still recall the time I witnessed a Pareto chart in use for the very first time. Our manufacturing team was facing a myriad of problems related to quality, and there was a narrative contention on what required attention first. A certain quality manager walked into the conference room and displayed a simple chart on the projector, and all of a sudden, the way forward was blindingly obvious. That's the impact of a Pareto chart: it slices through the commotion and indicates where to channel your energy.

Whether you are attempting your PMP certification or have already been employed as a project manager, it is of utmost importance to know and understand Pareto charts. These amazing visualization tools capture the Pareto Principle, which suggests that roughly 80 percent of effects come from 20 percent of causes, otherwise known as the 80/20 rule. When looking through the prism of project management, it means that approximately 80 percent of the problems big projects face can be boiled down to 20 core issues.

This is the most detailed that you will find on the use of Pareto charts in PMP context. You will know how to create these visualizations, how and when to use them, and most importantly, different examples from a variety of industries that show their usefulness. By the end, I can assure you that you will have one more weapon added to your project management tools.

A Pareto chart is a vivid depiction that integrates both bar graphs and line graphs to illustrate each individual figure alongside the cumulative total figure. This chart aids in determining the "vital few" construct that has the most critical impact on a particular situation and or problem, named after the economist Vilfredo Pareto.

Around the early 1900's Pareto made an observation that roughly 80% of the land in the region was economically utilized by only 20% of the population, roughly experiencing economic utilization. This observation eventually formulated, and we now use this concept, the Pareto Principle or the 80/20 principle. While Pareto was observing the economic distribution, he would have never envisioned how this could apply across so many disciplines, such as project management.

What stands out in a Pareto chart and is portrayed uniquely is the dual-nature design. The vertical bars represent and show the frequency or count of those different causes, arranged in descending order from left to right. At the same time, a cumulative percentage line rises across the chart showing sight of factors contributing most to the total. The value of this portrayal allows the maximum amount of effort to be put in the area of focus, where the results can be yielded in value.

The basic principle of the Pareto chart is the well-known 80/20 rule that states approximately 80% of results are due to 20% of the effort. It's not a law of math; rather, it is a heuristic it is a rule of thumb that points to an imbalance. It is important to notice that it can not be a mathematical law, because these numbers can change (maybe it becomes 70/30 or 90/10), but the main thesis remains true: the vast majority of change in results is the product of a small number of causes.

In my career in project management, this is a principle I have witnessed time and time again. If we think of customer complaints, around 20% of the product features are responsible for 80% of them. Approximately 80% of project delays can be tied to 20% of task types. And roughly 80% of the productivity in a team is typically concentrated in 20% of the team members.

The 80/20 rule assists in alleviating the assumption that all inputs and outputs are equal. Rather, it helps us find the key few things that will lead to the best results. For PMP practitioners, it means targeting scarce resources in those areas that will best serve their objectives.

A prominent fallacy I encounter repeatedly is the assumption that all percentages need to sum up to 100. The 80/20 principle is not concerning percentages adding to 100; rather, it is concerned with relative allocation. The key understanding is divided attention, not mathematics.

Here are some actual applications of the Pareto Principle:

• In software development, 80% of errors stem from 20% of the code.
• In sales, 80% of revenue is generated by 20% of clients.
• In inventory control, 80% of the worth is generated by 20% of the items.
• In time management, 80% of results stem from 20% of activities.
• In project risk management, 80% of the potential impact stems from 20% of the identified risks.

Making a Pareto chart is not particularly difficult, but it is important to follow a systematic approach. Over the course of my career, I have created dozens of these charts and always follow these fundamental steps:

• Determine the issue and gather the data: Make sure that you have a clearly defined issue that is quantifiable in some way. Make sure you are collecting data that is relevant to your problem.
• Establish relative percentages: Evaluate how much each category contributes to the total value.
• Establish cumulative percentages: Aggregate the percentages in a left-to-right fashion for the categories.
• Sort categories by decreasing value: Move the leftmost high-frequency items to the right in decreasing order.
• Draw the chart: Construct rectangles for each category and insert the cumulative percentage line.
• Evaluate the results: Determine where the cumulative line is at 80% to help you pinpoint the few vital causes.

There are many available tools to create Pareto charts. Microsoft Excel, with its unprecedented accessibility and functionality, is arguably the best. A Pareto chart can be made in Excel by:

• Inputting the data in two columns (categories and values)
• Sorting the values from highest to lowest
• Highlighting the data to be used and inserting a combo chart
• Changing the secondary axis to show percentages of cumulative values
• Making additional style changes as preferred

For users who prefer specialized project management software, Minitab, JMP, QI Macros, or online tools like Canva and Tableau allow professional-looking Pareto charts with added functionality.

Within the PMP scope, Pareto Charts also enjoy a unique prominence among the quality management tools. The PMBOK Guide recognizes Pareto Charts as one of the major instruments in the Control Quality process, which is part of the Monitoring and Controlling Process Group.

From my experience as a PMP practitioner, I have appreciated the help Pareto charts provide in:

• Quality Control: Identifying the various types of defects or issues in a process.
• Defect control in Risk Management: Prioritizing risks according to their possible impact.
• Stakeholder Communication: Visual representation of priorities for use by team members and other stakeholders.
• Resource Management: Deciding on what specific areas to direct scarce resources in order to maximize their use.
• Root Cause Analysis: Deciding what problems require further detailed examination.

The PMBOK Guide has incorporated a wide range of quality management tools and techniques, and in doing so, makes mention of Pareto Diagrams. In the PMBOK Guide, it is stated that "the analysis is focused on identifying the vital few sources and not the many trivial ones that often cloud the analysis." This is best described as the approach in the focus principle where "the less, but more important, item(s) should be emphasized."

Although Pareto charts can be helpful, they do not work for every scenario. I learned this the hard way with specific types of problems. These are some key points to keep in mind when considering Pareto charts:

• Data requirements: In order to use Pareto charts, you need to have specific data that can be categorized as well as counted. It is not as useful when dealing with more subjective issues or problems that are difficult to measure.
• Causation vs. correlation: A Pareto chart can illustrate which factors occur most frequently or have the most impact, but it does not prove causation. Something occurring most frequently does not mean that it is the root cause.
• Dynamic situations: In fast-paced situations, today's Pareto chart could very well be obsolete tomorrow. I have witnessed teams make these errors with outdated Pareto analyses.
• Complex interdependencies: When there are intricate relations and dependencies to problems, oversimplifying the issue with a simple Pareto analysis will likely lead to erroneous conclusions.
• Small sample sizes: Lack of sufficient data can result in Pareto charts creating fictitious patterns that suggest misleading priorities.

Don't use Pareto charts when there is inadequate data, there is overlap among the categories, qualitative analysis is needed, or the situation is changing quickly.

As I have found in my experience, assisting an organization to successfully implement Pareto analysis is much more than simply generating organizational charts; it is more about integrating processes and changing the culture. This is how I have enabled organizations to adopt a Pareto mindset in their decision-making.

Creating a Data Infrastructure

Prior to constructing meaningful Pareto charts, having reliable data is paramount. Collaborate with the relevant teams to:

• Define what information needs to be gathered
• Develop methodical collection procedures that are easy and uniform
• Ensure the data is stored in a usable format and can be accessed by all relevant stakeholders
• Set specific timeframes for data collection

Training Teams in Pareto Thinking

In order for Pareto analysis to become part and parcel of an organization, they must understand the 80/20 principle. This means they should not only learn how to draw the Pareto charts but also understand what goes behind them. Training sessions must contain:

• Basic statistical principles
• Use of actual company data in practice sessions
• Decision-making sessions based on results from Pareto analysis
• Common mistakes and ways to avert them

I prefer running a workshop where participants are able to apply Pareto analysis on their actual work challenges as opposed to giving them hypothetical examples.

Creating Accountability for Action

Of all the activities for which Pareto charts provide value, driving action is the most important. Create defined procedures for:

• Allocating responsibility over key concerns raised
• Defining deadlines for key priority drivers
• Evaluation of Results of Action Taken
• Outcome Reporting for Stakeholders

For an organization I worked with, we introduced "Pareto Reviews", where teams had to defend their analyses and action plans to senior management.

Celebrating Pareto Success Stories

Nothing reinforces a new practice like visible success. When incremental improvements can be traced back to the use of a Pareto analysis:

• Capture the problem and what outcome Pareto Analysis is intended to achieve.
• Calculate the outcome value in helpful business terms.
• Disseminate stories throughout and within all the departments and teams.
• Acknowledge teams that have properly applied Pareto thinking.
• Effective use of Pareto analysis.
• Advertising and Promotion through Organizational Communication.
• Using Social Media.
• Electronic Communication.
• Showcasing Success Stories on the Digital Sport/Business Channel.
• Prepare an advertising and marketing plan that portrays experts who have shown great success by utilizing the chosen and fabricated new advice.
• Solving Problems in History, Science, Literature, Art, Nature, and Athletes/Activities.

While the fundamental idea of a set Pareto chart has not shifted in decades, modern technology seems to have changed its alternatives and prospects quite remarkably. Here is what modern transformation means for Pareto Analysis.

Pertain to Big Data Apply Pareto Analysis

A conventional Pareto chart would focus on thousands, even hundreds, of data points. With the onset of big data technologies, there are now believable claims made to look into millions or even billions of events. This size highlights benchmarks that would otherwise be overlooked in smaller samples.

Just recently, I had a project with a telecom company that used the Pareto Principle Technique on over 50 million customer interactions. This "mammoth" analysis uncovered these micro-segments of customer experience issues that were invisible in their traditional reporting systems, but these segments single-handedly accounted for a large proportion of customer churn.

Real-Time Pareto Chart Visualization

Through the modern dashboard tools available today, it is possible to create real-time Pareto charts that automatically update as new data becomes available. This change means that project teams can tackle emerging issues before they become critical.

In particular, one DevOps team that I consulted with was able to implement live Pareto charts of system errors, which allowed them to address issues as clusters, often referred to as 'emerging clusters,' within minutes, instead of relying on an end-of-day report.

AI-Enhanced Pareto Analyses

Artificial Intelligence is starting to come into play in enhancing the automation of Pareto Analysis through the automatic identification of appropriate categories, suggesting potential root causes for top issues remaining, and the prediction of smaller issues that may snowball into major ones. Interventions recommended by AI, rooted in historical data evidence, lead to the improvement of overall business outcomes.

Though these integrations of AI don't substitute human judgment, they do enhance the effectiveness and efficiency of always-powerful Pareto analysis.

Cloud-Based Collaboration Tools

Cloud technology has simplified the collaboration on Pareto analysis by geographically diverse teams in real time. Team members can contribute privately, hold discussions on interpretations, and then create plans of actionable strategies regardless of time and location.

This method of working together has been especially effective for worldwide project teams. A single multinational implementation project had teams spanning three continents utilize common Pareto charts for coordinating their quality enhancement activities.

Looking forward, I anticipate greater synergy between Pareto analysis and other data science methods, combining them into singular approaches that retain the simplicity and concentration of Pareto while employing more advanced statistical techniques.

To assist you in starting with Pareto charts for your projects, here are some valuable resources I have located:

Excel Templates

For many people, Microsoft Excel is still among the most user-friendly platforms for making Pareto charts. There are numerous free templates available:

• Microsoft Office Templates: In many versions, Excel comes with pre-loaded Pareto chart templates.
• QI Macros Trial Version: Provides free Pareto templates with limited capabilities.
• SixSigma.us Resources: Gives out Excel Pareto templates to download.

Online Tools

For people who want more advanced solutions online, try:

• Canva: Simple Pareto chart making available with their free tier.
• Tableau Public: More advanced visualization tools with free access.
• Google Sheets: Offers customizable graph features to make Pareto charts.

PMP-Specific Resources

Teaching materials tailored for PMP candidates include:

• PMI's ProjectManagement.com: Provides templates of Pareto charts tailored for project management.
• PM PrepCast: Contains Pareto charts in the free resources section.
• Rita Mulcahy's RMC Learning Solutions: Supplies practice exercises that incorporate Pareto charts.

In the hands of a project manager, Pareto charts have the potential to become one of the most useful tools. They assist in eliminating complexity by visually demonstrating factors that are most impactful and need attention.

In my career, I have observed that this particular area of focus is, more often than not, the differentiator between successful projects and those that stagnate due to mismanaged resources.

The importance of the Pareto charts is that they do not aim to be sophisticated, but rather aim to be straightforward. They tell the user what to do when they are faced with numerous alternatives. This reality serves us in project management, and life in general, that often times knowing exactly where to place your effort changes everything.