Channel News

Paretos Principle And The Channel

Monday, June 02, 2014

Author: Cam Wayland
In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country. He had observed that 80 percent of the property in Italy was owned by 20 percent of the people. It was Quality Management Pioneer Dr Joseph Juran however who suggested the principle within his field and then made the assumption that it could be applied to broader concepts. His theory was that 80 percent of the results of any situation are due to 20 percent of the contributors.

This idea is often applied today to data such as sales figures i.e. 80 percent of the sales results come from 20 percent of the clients. Given Juran's broader application and development of the 80/20 rule it is argued that Pareto's Principle has actually been inaccurately attributed to Pareto rather than Juran. Despite the possible misnaming of this rule, Pareto's Principle can be a very effective tool to help you manage yourself and the channel effectively.

What It Means

The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial. In Pareto's case, it meant 20 percent of the people owned 80 percent of the wealth. In Juran's initial work, he identified 20 percent of the defects causing 80 percent of the problems.

Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consumes 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world

Within the context of a channel program, you can look at the channel partners who are generating the majority of the sales results and you will find that the same principle applies. That is, twenty percent of your partners will be generating 80 percent of your sales results. The challenge is how you manage your portfolio of partners to ensure you “don’t have all of your eggs in one basket”. You need to ensure you decrease your risk, while still having the time to manage your internal and program resources wisely across the most appropriate partners.

Here is what people forget about with regards to the Pareto Principle. You know 80 percent of your channel sales will come from 20 percent of your channel partners. However, 20 percent of your channel partners will also cause 80 percent of your problems. The principle works both ways.

How It Can Help You

The value of the Pareto Principle for a channel manager is that it reminds you to focus your resources on the 20 percent of the channel partners that really matter. That is those 20 percent that can or should produce 80 percent of your results. Identify and focus on these partners. If something in your schedule or program has to slip, if something isn't going to get done, make sure it's not going to affect the focused 20 percent.

With that said, focusing entirely on your top 20% of partners is not practical in the real world. The business environment and circumstances change over time and you should not overlook those partners that have the potential to be in your top 20%. By also working with these partners the result will be that you will have a larger number of partners making up your top 20%, as your partner base as a whole grows and becomes more diverse. Doing this will therefore eliminate some of the risk of just strictly sticking to the Pareto Principle concept.

Helping a partner with potential become a significant contributor is a better use of your time and resources than helping an already great one become slightly more productive and terrific. Apply the Pareto Principle to how you manage the channel, but use it wisely. Don't just "work smart", work smart on the right things with the right partners and you will get the results you are looking for.

Best Practice Channel Management Ideas Using the Pareto Principle

  1. Define what the characteristics (beyond revenue) of the top 20% should be i.e. What makes a key account, is it the most profitable, key location, the largest, most potential, etc.
  2. Review your partner’s results and rank them monthly. Know who the top 20% are and who the remaining 80% are. Make sure you know why they are the top (or focus) 20% and re-prioritise quarterly at a minimum.
  3. Ensure you are measuring all of the required information to get the full picture, not just the good news or sales results.
  4. Ensure you are not only focusing on the existing top 20%. Implement KPI’s as part of any incentive scheme to help groom those partners with potential to move into the top 20%.
  5. Align your channel support programs in the same manner. 80% of your resources should focus on 20% of the channel in order to provide more “bang for your buck”.
  6. Implement a quarterly review mechanism to professionally remove those partners that are not supporting you and have no further potential to move into the top 20%. If this is not done you will not have the required resources to grow your channel profitably.

The 80/20 rule is both useful and diverse, and particularly applicable to channel partner management. Using it wisely as outlined above will enable you to focus and assign your channel resources appropriately in order to yield the best sales results for your company. The principle can also be used to reduce your business risk through continually growing and developing partners that could be in your top 20%. Business environments are dynamic and reviews of partner’s direction and performance should always be ongoing.

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