The year is 1848. A boy is born in Paris. His father is an
Italian marquis living in exile. The politics in Italy change,
allowing safe return for the family and a good education for the
boy, Vilfredo Pareto. As a young man, he gets good management jobs
and makes astute observations about economics. His ideas become
articles in economic journals that continue to influence economics
150 years later.
One of those ideas is known as the “Pareto
Principle.” It says, in essence, that 20 percent of a cause
creates 80 percent of the effect. We also know it as the
“80-20 Rule.”
The Pareto Principle saves countless hours for those who use it.
Every HME company manager should make it a standard tool. Here are
some ways to save time with the Pareto Principle:
- Sales
As a provider, 80 percent of your revenue comes from 20 percent
of your products. It is a reflection of what your company has
communicated (intended or not) that it does. If the list of
products is not what your company wants to be known for, then there
is waste in the time spent communicating. You need to redirect your
communications.
Eighty percent of your gross profit comes from 20 percent of
your products. If the list of products does not include the highest
gross margin products, then the company may be working harder for
profit than it must.
A low gross margin sale requires the same expenses for intake
and billing as a high gross margin sale. So long as the high gross
margin product is on the list of products the company wants to be
known for, you should find ways to grow revenue from the high gross
margin products more quickly than other revenue.
Eighty percent of your accounts receivable are attributable to
20 percent of your payers. If Pareto had a flaw in his principle,
it is because he did not get to observe health care in 21st century
America. My observation of many providers is that about 20 percent
of the payers produce about 90 to 95 percent of the revenue, or
about 10 percent of the payers account for 80 percent of the
revenue. Take this list of payers for your company and make sure
that the billing and collecting processes are as efficient as they
can be.
Generally, about 15 percent of a company's expense accounts
reflect 80 percent of the expenses. When managers are reviewing the
budget variance report, they shouldn't spend their time analyzing
an account that consumes 1 percent of your revenue.
Priority should be given to the handful of accounts that consume
80 percent of the revenue. Keep them on track and your budgeting
will work well. Steps should include submitting electronically to
all of the accounts, then having them make electronic
remittance.
Eighty percent of your referrals come from 20 percent of your
referral sources. Study this list to be sure that they are
providing referrals that are efficient users of the company's time.
If the referrals are what the company wants, there are at least
three other uses for the list. One is to make sure that these
referral sources stay pleased. They are the “A” list
and get invited to the company parties. Second is to become the
only provider these sources refer to for the desired products.
Third is to understand everything about these sources and the
referrals they produce: payers, what diseases are and are not being
referred, patient zip codes, etc. This information will point to
success factors and can be used to find more referral sources that
are like these.
If 80 percent of sales comes from 20 percent of products, it
likely follows that 80 percent of purchasing activity comes from 20
percent of the products. Develop your entire logistics function,
including purchasing, to be most efficient with these products. Set
up an automated replenishment program, or copy the purchase order
so that only the date needs to be added.
Twenty-five percent of a company's activities account for 80
percent of its expenses, so giving the same priority to
streamlining for all activities is not efficient. Reengineer that
25 percent of your company's activities that are consuming 80
percent of its costs.
Using the Pareto Principle simplifies a great deal. Pareto
rules.
Wallace Weeks is founder and president of Weeks Group Inc., a
Melbourne, Fla.-based strategy consulting firm. He can be reached
at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
